
CkR's nii 


ni 


Bnnk 


1 w 


%^i55]]tF / 


V4_^_ 


CGsmsGtttssmBa^ 




odern Business 



CANADIAN EDITION 

A SERIES OF EIGHTEEN TEXTS, ESPECIALLY PREPARED 

FOR THE ALEXANDER HAMILTON INSTITUTE COURSE IN 

ACCOUNTS, FINANCE AND MANAGEMENT 

EDITED BY 

JOSEPH FRENCH JOHNSON 

DEAN, NEW YORK UNIVERSITY SCHOOL OF COMMKECE, ACCOUNTS AND FINANCE 
NEW YORK CITY 

Title Author 

APPLIED ECONOMICS James Mayor 

ORGANIZATION AND MANAGEMENT Lee Galloway 

SELLING R. S. Butler 

CREDITS Lee Galloway 

TRAFFIC S. J. McLean 

ADVERTISING Lee Galloway 

BUSINESS CORRESPONDENCE . . G. B. Hotchkiss 

ACCOUNTING PRACTICE . . . / Leo Greendlinger 

lE. W. Wright 



CORPORATION FINANCE 
MONEY AND BANKING 



f William H. Lough 
I Fred W. Field 
TEarl Dean Howard 

I W. W. Sw ANSON 

BANKING PRACTICE E. L. Stewart Patterson 

FOREIGN EXCHANGE (Franklin Escher 

L E. L. Stewart Patterson 
r Thomas Conway 

INVESTMENT AND SPECULATION . Albert Atwood 

I Fred W. Field 

INSURANCE I Edward R^ Hardy 

I Fred W. Field 

REAL ESTATE ....... /Walter Lindner 

IE. W. Wright 

AUDITING Seymour Walton 

COST ACCOUNTS Stephen W. Oilman 

COMMERCIAL LAW Walter S. Johnson 



\ 



Applied 



conomics 



A PRACTICAL EXPOSITION OF THE 
SCIENCE OF BUSINESS WITH ILLUSTRA- 
TIONS FROM ACTUAL EXPERIENCE 



BY 
JAMES MAYOR 

PROFESSOR OF POUTICAL ECONOMY IN THE UNIVER- 
SITY OF TORONTO; AUTHOR OF "THE ENGLISH RAIL- 
WAY RATE QUESTION"; REPORT TO THE GOVERNMENT 
OF CANADA ON IMMIGRATION; AND VARIOUS OTHER 
BOOKS AND REPORTS 



iVlodern Business 

Canadian Edition 

Volume I 



ALEXANDER HAMILTON INSTITUTE 
NEW YORK 



w^^^l 



5 



^v\%^ 



COPYKIGHT, 1914, BY 

ALEXANDER HAMILTON INSTITUTE 

Copyright in Great Britain 1914, by 
ALEXANDER HAMILTON INSTITUTE 



FEB !9!9!4 

'DCI.A.'JG26 3 



EDITOR'S PREFACE 

The Modern Business Course and Service is designed 
for wide-awake business men. Its aim is to apply sci- 
entific methods of thought in the discussion of the vari- 
ous phases of business ; at the same time, to be practical, 
clear and interesting. 

The Course and Service was originally issued in the 
United States some years ago, and has been most favor- 
ably received by the business public. It has been revised 
from time to time and is kept up to date by the Staff 
of the Alexander Hamilton Institute. The Course is 
now rewritten for the use of Canadian readers. Three 
of the texts in this Canadian revision are entirely 
new. Every other book and pamphlet has either been 
thoroughly revised or is original matter written by some 
authority Avho is familiar at first hand with Canadian 
conditions and practice. The result is an unusual com- 
bination of the accumulated business knowledge and 
business experience of both Canada and the United 
States. 

The series of texts is the basis of the Modern Business 
Course and Service. It should be clearly understood that 
the texts are not designed to cover thoroughly and in 
detail every point that ought to be included in a study 
of present-day business. They do contain a treatment 
of all essential principles of the growing science of busi- 
ness. Applications of these principles will be found in 
the Talks, Lectures, Problems and Service. 



ii ECONOMICS 

It is not practicable to discuss the entire Course and 
Service in this brief introduction. I shall confine my- 
self to a summary review of the twelve text volumes. 

While the twelve volumes might well be regarded as 
a unit, nevertheless each volume is complete in itself 
and may be read independently of the rest. The sub- 
ject of "Economics" the reader will find is the key- 
stone of the business arch. A man who does not under- 
stand the laws that govern all business can never have 
a thorough grasp of any single business. The subject 
underlies business callings just as mathematics underlies 
engineering vocations. The purpose of the volume on 
"Economics" is to bring before the reader a clear idea 
of the business problems which economists have sought 
to solve and of the principles they have for the most 
part agreed upon. The author, Professor James Mavor, 
of the University of Toronto, is a well-known economist. 

The volume on "Organization and Management" is 
the most comprehensive text on the subject that has 
so far appeared. In the United States and Canada 
much progress is being made in the establishment of cor- 
rect principles in this field. The subject is engaging the 
attention of progressive business men throughout the 
world. The reader will, therefore, undoubtedly welcome 
the concrete discussion of the subject by Professor Gallo- 
way. 

Volume III, "Selling, Credits and Traffic," covers the 
three essential steps in the process of marketing goods. 
The original treatise on "Selling," by Professor Ralph 
Starr Butler, of the University of Wisconsin, has re- 
quired only slight alteration for Canadian use. The 
treatise on "Credits," by Professor Galloway, has been 
revised by Dr. Swanson, of Queen's University. The 
treatise on "Traffic" is the work of the Hon. Simon 



EDITOR'S PREFACE iii 

J. McLean, of the Board of Railway Commissioners of 
Canada, and is an important contribution to the Htera- 
ture of business. 

The volume on "Business Correspondence and Ad- 
vertising" has proved of particular interest to our 
subscribers in the United States. Business men in 
Canada will undoubtedly receive this volume with a sim- 
ilar degree of appreciation, especially as the text on Ad- 
vertising has been revised by a man thoroughly familiar 
with Canadian advertising practice. Mr. Hotchkiss' 
work on Business Correspondence treats the subject in 
a scientific, analytical manner. The present tendency 
is to eliminate much of the cold, formal tone and to let 
more of the writer's personality enter into his business 
correspondence. There is much for any business man 
to learn from this volume. 

Two volumes are devoted to Accounting. Volume V, 
on "Accounting Theory and Practice," elucidates the 
principles of the subject and gives to the reader the 
guidance he needs in training himself for the solution 
of accounting problems. The discussion of bookkeep- 
ing principles, of partnership and corporation forms and 
accounts, and of accounting for intangible expenditure 
and assets will be found of particular interest. I desire 
to express my sincere appreciation of the helpfulness of 
Mr. John I. Sutcliffe, C. A., of Toronto, and of Mr. 
E. W. Wright, of the Montreal bar, in making sug- 
gestions as to the revision of this volume for Canadian 
readers. 

Volume XI also is devoted to accounting. The first 
part covers the important work of the auditor, stating 
the principles which determine completeness in audits 
and giving concrete illustrations of the proper method 
to pursue in the audit of different businesses. The im- 



iv ECONOMICS 

portant subject of costs, which is treated in the second 
half of the volume, cannot be studied too closely by 
any one even remotely interested in manufacturing — and 
this includes bankers, wholesalers, accountants, and 
many others. 

Volume VI, on "Corporation Finance," is used as text 
in most of the universities in the United States where 
business courses are given. The description of sources 
from which corporations obtain their funds and of the 
methods they employ, is of decided value to any man in 
business, no matter what his vocation or position may 
be. The book is full of practical suggestions and can be 
understood by men who have had no previous training 
in finance. It has been carefully revised by Mr. Fred 
W. Field, Editor of The Monetary Times, who is one 
of the foremost authorities on the subject in Canada. 

Volume VII, on "Money and Banking," deals with 
the fundamental principles underlying financial op- 
erations. Professor W. W. Swanson, of Queen's Uni- 
versity, treats the Canadian phases of the subject. 

Volume VIII, on "Banking Practice and Foreign 
Exchange," most of which has been written by Mr. E. K. 
Stewart-Patterson, of the Canadian Bank of Commerce, 
is the only book that shows the inner mechanism of the 
Canadian bank. The banking act, the branch system, 
methods of organization, accounting and control are all 
thoroughly discussed. This volume will prove helpful 
not only to the Canadian banker, but to any business 
man who has any dealings whatever with a Canadian 
bank. 

Volume IX, on "Investment and Speculation," is de- 
signed not only for the benefit of men employed in stock 
and bond houses, but for all business men. Obviously, 
the information is especially valuable to those v/ho have 
securities to dispose of. The book describes stock ex- 



EDITOR'S PREFACE v 

change operations and explains how to value, and how 
to buy and sell, securities. The Canadian phases of this 
subject have been written by Mr. Field. 

Volume X, treating of "Insurance and Real Estate," 
and Volume XII, on "Commercial Law," will prove 
of great practical help to young men, as well as to execu- 
tives who are already handling problems in these fields. 
Real estate is becoming more and more of a factor in 
the development of Canadian resources. It requires the 
attention of all progressive men. The text on this 
subject has been carefully revised by Mr. E. W. 
Wright, of the Montreal bar. Commercial law, ob- 
viously, enters into every business transaction. The vol- 
ume on this subject by Mr. Walter S. Johnson, of the 
Montreal bar, is designed both to give a broad under- 
standing of the common law and to protect business 
men against common, and often costly, blunders. 

The editor has left every author complete liberty in 
the presentation of opinions and conclusions. Each 
author is alone responsible for the views he expresses. 

Here and there topics are treated in more than one 
volume. Some apparent duplication is necessary in 
order to make each subject comprehensive. The reader 
is advised, however, to read both discussions of the same 
subject, for in one text it will be dealt with more fully 
than in another, where it may be referred to merely for 
the sake of completeness, 

Joseph French Johnson. 
New York University. 



TABLE OF CONTENTS 



PART I: PRODUCTION 

CHAPTER I 
INTRODUCTION 

SECTION PAGE 

1. Economics as a Science 1 

2. The Social Aspect 1 

3. Why a Study of Economics is Important .... 2 

4. The Governmental Aspect 4 

5. The Four Economic Processes 5 

6. Economic Processes Depend Upon Certain Conditions . 6 

7. Social Stability Sometimes Disturbed with Interior Ad- 

vantage 7 

8. The Final Purpose 8 

9. The National Dividend 8 

10. Private Luxury 9 



CHAPTER II 
PRIMARY PHASES OF PRODUCTION 

11. Detail and Mass Production 11 

12. The Effect on a Nation as a Whole 13 

13. Simple Form of Production 13 

14. Raw Material 14 

15. Labor 15 

16. Complex Production l6 

17. Supplementary Requisites 17 

18. Who Owns the Finished Product? 17 

19- Primitive Causes of Disputes 18 

vii 



viii ECONOMICS 

CHAPTER III 
FACTORS OF PRODUCTION 

SECTION PAGE 

20. Three Divisions of Labor ......... 20 

21. Land and Capital ........... 21 

22. Fixed and Circulating Caj^ital ........ 21 

23. Sources of Capital 22 

24. Functions in Complex Production ....... 23 

25. Law of Increasing Returns 21 

26. Reasons for Industrial Combinations ...... 25 

27. Conditions Which Must Be Present ...... 26 

28. The Law of Diminishing Returns . . . . . .26 

CHAPTER IV 
EFFECTS OF TRANSPORTATION 



29. TransiDortation as an Incident in Production 

30. Applied to ^Manufacturing Industries . . . . 

31. Is Transportation Wasteful? ...... 

32. Methods of Transportation ...... 

33. Opening New Markets ........ 

34. Effects on Labor and Ca^Dital ...... 

35. Effect on Land ......... 

36. Effect on Rents .......... 

CHAPTER V 
FIRST STAGE IN PRODUCTION 

37. Stages of the Process of Production . . . . 

38. Exploitation or Extractive Stage of Production 

39. Agriculture and Exploitative Industry 

40. Passing of Compulsory Cultivation . 

41. Beginning of Commercial Cultivation 

42. Tribal Land Ownership 

43. Objection to Commercial Land Ownership 

44. Advantages of Commercial Land Ownership . 

45. Decline of European Small Farmer . 

46. Return of the Small Cultivator .... 

47. Land Holding for Social and Political Distinction 



29 
29 
31 
31 
34 
35 
35 
35 



37 
38 
39 
40 
41 
43 
44 
44 
45 
46 
47 



CONTENTS ix 

SECTION PAGE 

48. Land Ownership on European Continent .... 48 

49. Cultivation of Wheat 49 

50. In Europe and South America 50 

51. In the United States and Canada 51 

52. Specialist Wheat Farmers 52 

CHAPTER VI 

AGRICULTURE 

53. Immobility of Agricultural Capital . . . . . .53 

54. Agricultural Capital and Credit 54 

55. Farming a Hazardous Business 54 

56. Farm Loans 56 

57. The Farmer Inevitably a Borrower 58 

58. Evil of Usurious Rates 58 

59. Speculation the Result of Easy Borrowing Facilities . 59 

60. Farm Mortgages 60 

61. Situation in Canadian Northwest . 61 

62. Crops as Security 62 

63. Co-operative Agricultural Credit 63 

64. Usviry Gradually Vanishing 64 

65. Co-operative Loan Societies Less Necessary than For- 

merly 66 

66. Marketing Farm Produce 67 

67. Establishing Wheat Prices 69 

68. Establishing Grade and Quality 69 

69. From Elevator to ]\Iarket 70 

70. Financing Crop Movements 71 

71. Wheat Market Highly Organized 72 

72. Meat Production as an Extractive Industry .... 73 

CHAPTER VII 

MINING 

73. Gold Mining 75 

74. Two Kinds of Gold Deposits 75 

75. Gold Mining in British Columbia 77 

76. Silver Mining 77 

77. Decline in Value of Silver 78 



lECTION 

78. 



ECONOMICS 

PAGE 

Attempt to Sustain the Price of Silver in the United 

States 78 

Effect of Silver Legislation 79 

Mining Camps Tend to Raise Prices ..... 80 

Copper Mining . 80 

Nickel Mining 81 

Iron Mining 81 

Iron Industry in United States 82 

More Economical Handling ........ 83 

Iron Mining in Canada .83 

Coal Mining 84 

Coal Mines Subject to Law of Diminishing Returns . . 85 

Guarding Against Law of Diminishing Returns ... 85 

Waste in American Coal Mining 86 

Labor in Exploitative Industries 87 

CHAPTER VIII 
MANUFACTURING STAGE OF PRODUCTION 

Characteristics of Complex Production 89 

Specialization in Manufacturing 89 

Localization of Industries 90 

Factors in Locating an Industry 91 

Effect of Male and Female Labor upon Location ... 92 

Division of Labor and Over-production 93 

Over-production of Articles of Future Usefulness . . 94 

Over-production of Railways 95 

Over-production of Crops . 96 

CHAPTER IX 
GETTING GOODS TO MARKET 

Marketing a Phase of Production 97 

Circulation of Capital an Important Factor .... 98 

Injurious Bargaining 98 

Advertising a Factor in Production 99 

Wholesale and Retail Trade . . , . . . . .101 

Will the Middleman be Eliminated? 102 

Seasonal Trades 103 



CONTENTS xi 



PART II: EXCHANGE 

CHAPTER I 
BARTER AND MONEY 

SECTION PAGE 

108. Barter Economy 104 

109. Examples of Primitive Barter . . 105 

110. The Origins of Money 108 

111. Gold and Silver as Money 108 

112. Money a Standard of Value 110 

CHAPTER II 
UTILITY AND VALUE 

113. Value Based on Utility or Exchangeability . . . .112 

114. Intense Desire and Urgent Demand 114 

115. Various Degrees of Desire 114 

116. Diminishing Usefulness 115 

117. Disutility 115 

118. Quality of Commodity and Character of Need , . .116 
lip. Value Dependent upon Place or Condition . , . .117 

120. Exchange Value 118 

121. Effective Demand lip 

122. Supply 119 

123. The Law of Substitution 120 

CHAPTER III 
MARKETS 

124'. Origin of Local Markets 122 

125. Market of Nijni Novgorod 122 

126. Protecting Market Routes 123 

127. Some Well-known Market Places 123 

128. Operation in a Typical Local Market 124 

129. Market in a General Sense 126 

130. How to Approach Study of " The Market " . . . .127 

131. Supply and Demand Illustrated 128 



di ECONOMICS 

ECTION PAGE 

132. How Prices are Established .129 

[33. External Influences upon Market . . . , . . .130 

CHAPTER IV 

PRICES 

A "Fair Exchange" 132 

Customary Prices 134 

Money as a Standard of Value 134 

Quantity of Gold and Silver in Existence . . . .135 

National Monetary Laws 136 

Effect of Gold and Silver Values upon Prices . . .137 
Bimetalism a Cure.'' 138 

CHAPTER V 

SOME FACTORS THAT AFFECT PRICES 

Climatic Variations . 140 

Effect of War on Prices 141 

Effect of Political Elections ........ 142 

Changes in Production . .143 

Variation in Relations of Commodities . . . . .145 

Applied to Metals 146 

Changes in Consumption . . .148 

Growth of Population in Urban Centers . . . . .148 

Causes for Movements of Population 149 

Effect on Prices . . . .151 

Changes in Standard of Comfort 152 

Changes of Fashion 153 

CHAPTER VI 

EFFECT OF COMPETITION AND MONOPOLY UPON PRICES 

Competition 155 

Monopoly 156 

Monopoly Prices 157 

Government Monopolies 157 

Monopolies Subject to Law of Substitution . . . .158 
Practical Effect of a Typical Case 159 



CONTENTS xiii 

SECTION PAGE 

159. Quasi-monopolies I60 

160. Are Monopoly Prices Excessive? I60 

161. The Situation in the United States I6I 

162. Land Monopoly 162 

163. Fluctuation of Land Prices l63 

164. Competition in Land Selling 164 

165. Rates of Interest Affect Land Prices 165 

166. Changes in Geographical Relations 167 

CHAPTER VII 
MONEY AND CREDIT IN RELATION TO PRICES 

167. Expansion and Contraction of Credit 170 

168. Effect of Quantity of Money in Circulation . . . .171 

169. Periodical Payments 171 

170. Settlement of Bank Balances 172 

171. Gold Required for International Trade 173 

172. Money in Circulation Offsets Prices Through Credit . 174 

173. The Panic of 1907 175 

174. Fiduciary Currency 176 

175. Paper Money 177 

176. An Hypothetical Case 178 

177. Fiduciary Currency in International Trade . . . .179 

178. Money and Credit Combines Influence Prices . . .180 

179. Bank Reserves 181 

180. Importance of Elastic Currency System 183 

CHAPTER VIII 
EFFECT OF LEGISLATION ON PRICES 

181. Changes in Monetary Law 185 

182. Duties 185 

183. Who Pays the Tax.? How to Test 187 

184. Speculation and Prices 189 

185. Cornering I90 

186. Regulation of Price Fluctuations 192 

187. Cost of Living 192 

188. Traide Cycles 19,3 



xiv ECONOMICS 



PART III: DISTRIBUTION 

CHAPTER I 
PROBLEMS OF DISTRIBUTION 



PAGE 



189. Significance of Distribution 197 

190. Difficulty of Establishing an Ideal System . . . .199 

191. The Present System 200 

192. Economic Equality . 201 

193. Analysis of Distributive Process ....... 202 

194. Guilds 203 

195. Beginning of Unrestricted Trade 204 

196. Competition the Result , . . , . 205 

CHAPTER II 
PROCESS OF DISTRIBUTION 

197. Factors of Production 208 

198. Productive Industries Classified . . .' . . . . 208 

199. Large Corporations 210 

200. Effect of Large Enterprises 212 

201. Employer's Position in Process of Distribution . . .213 

202. Hovr Result of Production is Distributed . . . . 214 

203. Deficiency or Surplus 215 

204. Employer's Double Function 2l6 

205. Influence of Supply and Demand .216 

CHAPTER III 
PROFIT AND WAGES 

206. Source of Profit = . . 219 

207. How is Profit Brought About ?......., 220 

208. Profit Distribution in Joint Stock Company. . . .221 

209. Employers' Associations 221 

210. Superintending Labor 222 

211. Salaries 223 



CONTENTS XV 

SECTION PAGE 

212. Education of Superintending Laborers ..... 224 

213. Classes of Manual Laborers . 226 

214. Uniform Wages 227 

215. Old Age Pensions 228 

21 6. Labor Organizations 229 

217. Difficulty of Transporting Labor . 229 

218. Labor Cannot Be Stored 231 



CHAPTER IV 

RATE OF WAGES 

219. Value of Products and Value of Wages 233 

220. Nominal and Real Wages 233 

221. Efficiency of Laborer 234 

222. Marginal Wages 236 

223. Demand and Supply Prices of Labor 237 

224. Labor Reserves 238 

225. Effect of Population 239 

226. Other Influences on Labor Reserves 240 

227. Minimum and Maximum Wages . . . . . . .241 

228. Labor Not Sole Determining Factor in Value of Prod- 

uct 243 

.229. Why Distribution is Not Based ufDon Product . . . 244 

230. Supporting Laborer During Period of Production . . 245 

231. Voluntary Association 246 

232. Advantages of Modern System 247 

CHAPTER V 
PRACTICAL LABOR PROBLEMS 

233. Labor Combinations 248 

234. Change in Labor Union Control 249 

!235. Strikes 251 

236. Strike Failures 252 

: 237. Collective Bargaining .......... 252 

; 238. Economic Effects of Trade Unionism 253 

'' 239. Trade Unionism in United States 254 

240. Trade Unionism in Canada 255 



xvi ECONOMICS 

SECTION PAGE 

241. International Trade Unions 256 

242. " Closed " and " Open Shop " 257 

243. Woman's Labor 257 

244. Voluntary Minimum Wages 258 

245. Statutory Minimum Wages 260 

246. .Statutory Maximum Wages 262 

247. Conciliation and Arbitration ........ 262 

248. Trade Unionism and Economic Theory 265 



CHAPTER VI 
CAPITAL AND INTEREST 

249. History of Interest 267 

250. Early Theories of Interest 268 

251. Current Theory 269 

252. Market Rate of Interest 270 

253. Four Divisions of Money Market . 270 

254. Influence of Monetary Combinations 272 

255. Function of Capital 273 

256. How Capital Comes into Play 274 

257. Railway Construction in United States 276 

258. Effect in Europe 277 



CHAPTER VII 
THE LANDOWNER'S SHARE 

259. Value of Land Depends upon Rent 279 

260. Origin of Rent '. 280 

261. Land as a Commodity 281 

262. Similarity to Other Productive Enterprises . . . . 282 

263. Land Policy in United States and Canada .... 283 

264. Increase of Land Prices 284 

265. Who Benefits.? . 284 

266. Theory of Rent . 285 

267. Rent as Surplus 286 

268. " Surplus " Theory Not Always Applicable .... 287 

269. General Application of the Term Rent 288 



CONTENTS 



PART IV: CONSUMPTION 

CHAPTER I 
CONSUMPTION FOR SOCIAL USE 

SECTION PAGE 

270. Classification of Consumption 289 

271. National Consumption 290 

272. Effect of Government Consumption upon Demand , , 292 

273. Diversion of Capital 292 

274. Voluntary Consumption for Social Use 294 

CHAPTER II 
CONSUMPTION FOR PERSONAL USE 

275. Personal Requirements 295 

276. Flood 296 

277. Clothing 298 

278. Shelter 299 

279. Philanthropic Housing Experiments in Europe . . .301 

280. Typical Results 302 

281. Experiments by Employers . . , 303 

282. Houses Owned by Workmen 304t 

283. Subject to Economic Laws 305 

284. Miscellaneous Personal Consumption 307 

285. Proportions of the Constituents of Consumption . . 309 

286. Cost of Living 309 

287. Changes in 1850 and 1875 311 

288. Prices 1890-1909 312 

289. Important Increases 312 

290. Conclusion to be Drawn 314 

CHAPTER III 
PRODUCTIVE CONSUMPTION 

291. Consumption of Natural Resources 317 

292. Conservation of Natural Resources 318 

293. Causes of Waste „ . . . . 320 

C 



xviii ECONOMICS 

SECTION PAGE 

294. Borrowing Necessary 322 

295. Effect of Legislation upon the Borrowing of Capital . 324- 

296. Consumption of Human Life and Energy .... 325 

297. Reactions of Consumption upon Production .... 326 

298. Reactions of Distribution upon Consumption .... 327 
299- Reactions of Consumption and Exchange 328 



PART V: THE ECONOMIC ASPECTS OF THE STATE AND 
MUNICIPALITY 

CHAPTER I 
PROTECTION AND FREE TRADE 

300. Laissez-faire 331 

301. Regulating Foreign Trade 332 

302. Protective Tariff 333 

303. Tariff for Revenue 334 

304. Free Trade in Great Britain 335 

305. Fair Trade Movement 337 

CHAPTER II 
REGULATION OF DOMESTIC TRADE 

SO6. Municipal Regulation 339 

307. State Regulation 339 

308. Arguments For and Against 341 

309. Miscellaneous State Regulations 342 

310. Control of Quasi-monopolistic Enterprises .... 343 

311. Banks 344 

312. Responsibilities of Government 344 

313. Disadvantages of Government Control 345 

314. Regulation of Railways 346 

315. Economic Effect of Railway Control ...... 346 

316. The Regulation of Trusts ......... 348 

317. Standard Oil Trust .......... 349 

318. Objections to Trusts in United States 350 

319. Difficulty of Dissolving Trusts 351 



CONTENTS xix 

SECTION PAGE 

320. Stock Watering 352 

321. Conclusion of Industrial Commission 355 

322. National Ownership of Land 355 

323. Distribution of Land a General Policy 356 

324. Nationalization of Industry 358 

325. Trusts Are a Step Towards National Ownership . . 359 



CHAPTER III 
TAXATION 

326. The Revenue 362 

327. Taxes on Income 362 

328. Imports and Exports 363 

329. International Trade Depends Upon Comparative Prices 364 

330. Classification of Revenue 365 

331. Graduated Income Tax , 367 

332. Two Theories of Taxation 368 

333. Who Pays Taxes? 370 

334. Marginal Producer 371 

335. Economic Strength of Groups 371 



CHAPTER IV 
THE BUDGET AND PUBLIC DEBTS 

336. Public Expenditures 374 

337. Annual Budget 376 

338. Public Debts 378 

339. Early Government Loans 379 

340. Government Securities 380 

341. Funded Loans 381 

342. Market Declines of Government Securities .... 382 

343. Effect of Other Securities 382 

344. Public Debts of Various Countries 384 

345. Temporary Loans and Loans for Fixed Periods . . . 385 

346. Conversion and Redemption of Public Debts .... 386 

347. Industrial Activity of the State 388 

348. Responsibilities of State Industrial EnterjDrises . . . 389 



XX ECONOMICS 

CHAPTER V 
LOCAL GOVERNMENT IN ITS ECONOMIC ASPECTS 

SECTION PAGE 

349. Local and Municipal Finance 392 

350. Provincial Taxation in Canada C93 

351. Corporation Tax an Income Tax 394 

352. Utilizing Prison Labor 395 

353. Municipal Finance 396 

354. Tax Exemptions 397 

355. Municipal Expenses Dependent upon Age of City . . 397 

356. Municipal Debts 398 

357. Method of Assessment for Municipal Taxes .... 399 

358. Municipal Administration . 401 

359. Local Government Board in England 402 

360. Local Independent Action 402 

361. Municipal Enterprises 403 

362. Increased Municipal Indebtedness Results .... 404 

363. Municipal Enterprise in England Not Wholly a Success 404 

364. In the United States 405 

365. In Canada 406 

366. Municipal Officials 406 

367. Agitation for Commission Government 408 

368. Economics of Municipal Enterprise . . .... . 408 



CHAPTER VI 
SOCIAL LEGISLATION 

369. Factory Acts . . . 411 

370. The Working Day . 413 

371. Factors to be Considered 414 

372. Accident Compensation 416 

373. German Accident Insurance 418 

374. German System Not Financed by State 420 

375. Workmen's Compensation Act in England . . . .421 

376. Federal Compensation for Accident in the United States 422 

377. Question of Responsibility 423 

378. Individual and Collective Responsibility Compared. . 425 
379- Assumption of Costs 426 



CONTENTS xxi 

SECTION PAGE 

380. Economic Effects of Workmen's Compensation Systems 428 

381. Old Age Pensions 429 

382. History of Pension Acts 429 

383. Canadian Situation 431 

384. Labor Exchanges 431 

385. A New Experiment 432 

386. " Right to Work " 433 

387. Unemployment 434 

388. Insurance Against Unemployment . » . . . . 435 

CHAPTER VII 

SOCIALISM 

389. Origin and History of Socialism . 436 

390. Progress a Result of Circumstances 438 

391. Classification of Socialist Doctrines ...... 439 

392. Explanation of Socialist Doctrines 441 

393. Various Methods 443 

394. Significance of the Movement 445 



PART I: PRODUCTION 

CHAPTER I 

INTRODUCTION 

1. Economics as a science. — The difference between a 
science and a merely disconnected series of statements 
is that a science offers an orderly sequence of ideas. 
Economic science may thus be said to present an orderly 
sequence of ideas concerning that part of life which con- 
sists in the experience of needs and in their satisfaction 
considered in relation to the resources available. 

The needs of mankind are not exclusively susceptible 
of satisfaction by material resources; but most of our 
fundamental needs are of this character. Those of our 
needs which are satisfied by other than material things 
cannot in general be satisfied except by the sacrifice or 
surrender of material resources. The first and continu- 
ally recurrent need of all living beings is food — indeed, 
for any particular living being, a particular kind or 
range of kinds of food — susceptible of assimilation by the 
organs of the body. Other appetites emerge as the liv- 
ing being reaches maturity — appetites scarcely less im- 
perious than the appetite for food. The needs of mental 
and moral stimulus which may be held to be peculiar to 
man, although they be regarded as non-material, have, 
especially through their bearing upon the organization 
of society, a very definite economic aspect. Some of the 
data with which economic science concerns itself are no 
C— I— 1 1 



2 ECONOMICS 

doubt difficult to procure ; but a very large part of this 
data lies within us and about us, although this fact does 
not necessarily render the study an easy one. 

2. The social aspect. — Economic science as it has de- 
veloped in modern times lays great emphasis upon the 
essentially social character of the economic processes; 
that is, it purports to investigate in a critical manner 
the extent to which the operation of these processes makes 
for the benefit of the community as a whole. Nor is the 
expression "community" regarded in a narrow sense. 
There is included not merely the present living genera- 
tions, but, although more vaguely, the permanent com- 
munity whose interests are not always identical with 
those of a given social group at a particular moment. 

The science of economics looks, moreover, at the proc- 
esses which together comprise economic life as being 
organically related and as being conducted in relation to 
an organized body analogous to a household. In this 
large household, differing in many important respects 
from a tyjjical human household, there is a certain auto- 
matic distribution of benefits as there is in any well 
ordered family — although not necessarily in precisely the 
same manner as is customary in the family. The normal 
manner of the distribution of these benefits is the law of 
the household. In Eastern Europe, for example, the 
law of the family respecting shares of labor and shares 
in the product of labor is often very precise, and any in- 
fringement of it is apt to lead to the offender being 
ostracized not only by the family but by the community. 
The law with which we are concerned is not the custo- 
mary law, which is variable in different regions, but the 
normal manner of the production, exchange and distribu- 
tion of the products when these processes are carried on 
collectively. 



INTRODUCTION 3 

3. Why study of economics is important. — The 
purpose of the present volume is to apply current eco- 
nomic theories to the current methods by means of which 
the economic processes are conducted for the purpose of 
ascertaining what light these theories throw upon eco- 
nomic life. These theories, like other scientific theories, 
need not be regarded as of universal validity; but they 
are useful threads to hold in the hand. If we had no 
such thread to guide us we should be in the position of 
being lost in a fog. 

It should be realized that a mere statement of opinion 
is not in the proper sense a theory. A theory, properly 
so called, is a logical statement of the reactions which 
must follow certain given assumptions. Thus, for ex- 
ample, if we assume that we have a certain temperature 
and a certain atmospheric pressure, a knowledge of the 
theory of the expansion of gases would enable us to pre- 
dict the behavior of certain gases under the given condi- 
tions or under any other conditions which might also be 
assumed. Physical experiments are comparatively easy ; 
social experiments are very difficult. It is, therefore, 
necessary to rely chiefly upon observation, and in draw- 
ing conclusions from observations it is necessary to make 
certain provisional assumptions. These assumptions can 
be corrected as our observations accumulate. 

It is the interest alike of the student and of the man 
of affairs to see as far as possible into the truth of things. 
If we were to look only at those aspects of life which ac- 
corded with our preconceived opinions, we should gather 
little. Fault may be found if an erroneous view is given, 
but fault cannot legitimately be found on the ground 
that the view is critical. A critical point of view is es- 
sential to knowledge. Possession of a knowledge of the 
principles of economic science will not make a man a 



4 ECONOMICS 

business man ; but such knowledge may be turned to in- 
valuable account by one who has a talent for business 
and opportunity to exercise it. 

4. The governmental aspect. — Apart from the view 
of economic science as concerned with the spontaneous 
activities of individual members and groups of members 
of the commrmity, and with the relations of these to the 
welfare of the whole, there is the view concerned with 
the economic side of the governmental activities of the 
state. The government of a state is conducted by per- 
sons who have been endowed with power by the peo- 
ple, or by inheritance, or who have been able to seize 
power by force. In any case, the exercise of govern- 
mental power involves economic relations between the 
authority which exercises it and the people over whom it 
is exercised. These economic relations are partly of a 
compulsory character, as in taxation, and partly of a 
contractural character, as in the postage regulations. As 
the functions with which governmental authority is en- 
trusted become more numerous, the extent and intensity 
of these economic relations become greater. 

While the exercise of the functions of government is 
an art and not a science in the strict sense, the science 
which concerns itself with the functions of government 
from a comparative and critical point of view is generally 
known as political science. That part of political science 
which is concerned with the methods and course of those 
activities of the government in which the government 
controls, acquires and intromits with property belonging 
to the community either collectively or individually, is 
political economy in the strict sense. 

There can be no definite division between political 
economy in the sense of the public economy of the state 
and political economy in the sense of the economy of the 



INTRODUCTION 5 

community, because the reactions of the two spheres of 
activity are too intimate for division. For the sake of 
convenience, however, it is advisable to treat each of the 
spheres separately in order to make clear the character- 
istics of each. While, however, they may be separated 
in thought, they cannot be regarded as otherwise than 
inseparable in economic life. 

5. Tlie four economic processes. — The economic 
processes are customarily catalogued as follows: — Pro- 
duction, Exchange, Distribution and Consumption. 
The order in which these processes are studied is a matter 
of indifference; the important point to notice is that 
they are interacting parts of one whole. That whole 
is economic life. It is thus impossible to understand 
the phenomena of exchange without also understanding 
the phenomena of distribution, consumption and pro- 
duction. 

In different parts of the world the methods vary and 
in different ages methods have varied ; but in all places 
and times, all forms of economic life yield upon analysis 
these processes, by whatever name they may be called. 
In some of the forms the differentiation of the processes 
may be obscured. For example, in the patriarchal or 
undivided family, the operation of distribution, and still 
less that of exchange, may not be obvious ; in such a case 
the important and obvious processes are production and 
consumption; the others assume a minor place. 

In more highly developed industrial societies, ex- 
change and distribution come to be regarded as of ob- 
vious importance and it is even usual in such societies 
to overestimate them and to underestimate the signifi- 
cance of production and consumption. 

The main point to remember is that no matter what 
form economic life may assume it is a unity and that one 



6 ECONOMICS 

element cannot be affected without influencing the other 
elements. The economic processes appear on investiga- 
tion to be involved in series of more or less complicated 
reactions. The study of economic science is chiefly de- 
voted to investigation of the reactions. 

6. Economic processes depend upon certain con- 
ditions. — It has been observed that the economic proc- 
esses are concerned primarily with material things; but 
economic life is not composed exclusively of these because 
for some non-material things — the things of the mind 
and of the passions— material things will be exchanged. 
"What will not a man give in exchange for his life?" 
But the economic processes as they concern the things 
of the body or the material side of life must first engage 
our attention. 

There are certain indispensable conditions to which all 
of the economic processes are subject. These are time 
and space. There are also certain contingent conditions 
without which the economic processes cannot be con- 
ducted with smoothness and regularity — ^these are na- 
tional security and social stability. The indispensable 
conditions need no illustration; the desirability of the 
contingent conditions may be best illustrated by cases 
in which they are absent. 

During the siege of Kars in Armenia — the Turkish 
fortress which maintained a protracted defense in the 
Russo-Turkish War of 1876-77 — the villagers beneath 
the fortress, which was situated on a precipitous river 
bank, drove their cattle to the fields in the morning and 
drove them home at night. Kussian and Turkish shells; 
were being hurled through the air over the heads of the 
villagers during the course of an almost incessant bom- 
bardment for about three months. This is an example 
of industry without national security. 



INTRODUCTION 7 

During the general political strike in Moscow in De- 
cember, 1905, while a great part of the city was in the 
hands of revolutionists, and while customary occupations 
were otherwise altogether suspended, train loads of flour 
were allowed by the strikers to enter the city. Every 
morning there was a truce during which the people went 
through passages in the barricades to buy food. This 
is an example of industry while social stability was sus- 
pended. In these instances economic life was carried on, 
although under great disadvantage. 

7. Social stability sovietimes disturbed with interior 
advantage. — While social stability is a contingent con- 
dition, of organized production, avoidance of disturbance 
of the social order at a particular moment may not be in 
the best interests of the community even in an economic 
sense. If the social order were never disturbed there 
might be no progress unless we were to suppose that 
the limits of progress had all been reached. The Amer- 
ican Civil War is a convincing proof that the social 
order may be temporarily disturbed with profit in order 
to get rid of an institution which brings it into peril. 

It is sometimes, but not invariably, possible to effect 
changes of an important character gradually, without 
disturbing the social order. In all cases, however, 
whether or not the event may be justified by subsequent 
history, violent disturbance of the social order com- 
promises the economical processes. Such disturbance 
renders production difficult or impossible, it alters dis- 
tribution, interferes with exchange and diminishes con- 
sumption. It may be that a national sacrifice may 
eventually result in benefit to the nation in an economic 
sense; but the sacrifice may have as an immediate eco- 
nomic consequence more or less serious depression and 
years may elapse before the economic equilibrimn is re- 



8 ECONOMICS 

established. The Russo-Japanese War may ultimately 
have consequences beneficial to Japan, although the sac- 
rifices it occasioned have affected the country for many 
years, 

8. The final 'purpose. — The end for which the eco- 
nomic processes are conducted is the satisfaction of the 
needs of mankind; indeed, production may be regarded 
as the beginning, and consumption as the end of this sat- 
isfaction. We may, therefore, properly consider in how 
far any particular act or series of acts conduces to in- 
crease or to diminish the total means available for the 
satisfaction of human needs. In other w^ords, we shall 
find ourselves constantly considering whether this or 
that legislative measure or this or that voluntary act is 
likely to conduce to the increase of what Adam Smith 
called "The Wealth of the Nation," or what others have 
called the rent, interest, wages and profits fund, or the 
"social or national dividend." 

9. The national dividend. — The production of com- 
modities by the people and their consumption must re- 
sult either in the increase or in the diminution of the 
national wealth, or "social dividend." Consumption of 
social wealth in the production of objects of beauty, 
even though these objects are not obviously productive 
of an equivalent amount of wealth, may be justified on 
the ground of the stimulus which beautiful objects give; 
they make for life in the best sense. But consump- 
tion in social wealth, even in such objects, must bear a 
certain proportion to the total consumption of any group, 
otherwise the social dividend may be diminished by such 
consumption. The stupendous tombs of the Egyptian 
kings, and the immense temples erected by them to the 
gods of Egypt were sometimes, although not alwaj^s, 
objects of beauty; but in certain ages the construction 



INTRODUCTION 9 

of them undoubtedly diminished the national dividend 
and impoverished the people. 

If an undue proportion of the national income is ex- 
pended upon works which, though productive, are not 
fully productive excepting at a remote period of time, 
the disturbance of the economic equilibrium which this 
expenditure involves may cause a diminution in the 
"national dividend." This result must follow whether 
the expenditure is made by the government or by private 
persons. If the government exacts from a people for 
any purpose an amount in taxes which is sufficient to 
cripple their productive powers, the "national dividend" 
must be reduced. 

10. Private luxury. — The question of private luxury 
in relation to the national dividend is a more difficult one. 
Excessive private luxury no doubt enervates the mind 
and the body and thus contributes to a diminution of 
production; but luxury is a relative expression and it is 
impossible to draw a precise line between a wholesome 
and desirable standard of comfort and a luxurious stand- 
ard. In Western Europe and in America, white bread 
is regarded as a necessary of life; in Eastern Europe 
white bread is looked upon as the food of the luxurious 
classes and the masses of the people eat brown or black 
bread. In Great Britain and America wine is a luxury; 
in France and Italy it is a necessity. Salt was regarded 
as a luxury in 1802-03 and tea was a luxury in Europe 
and America until long after that date. A library, 
which is a necessity to a man of letters, would be a luxury 
to a person who could not utilize it. Even to the man of 
letters five thousand volumes may be necessary, while 
a second five thousand might be regarded as a culpable 
luxury. 

Some people depend very little upon external stimu- 



10 ECONOMICS 

his ; they have their intellectual and moral resources with- 
in them. Such people are little inclined to luxurious 
living; but there are others whose powers of production 
are dependent for their support upon constant external 
stimulus. Their full powers are not developed without 
an amount of luxury which to some others might be in- 
jurious or fataL The most productive ages in an indus- 
trial, as well as in an artistic sense, have not been those 
of which asceticism was the dominant note. Sordid in- 
dividualism and complete disregard of social interests 
and of social progress have frequently developed among 
ascetic groups in various races. Individuals and nations 
alike do well to preserve the golden mean. 



CHAPTER II 

PRIMARY PHASES OF PRODUCTION 

11. Detail and mass production, — There are two as- 
pects of production. One aspect affords a view of pro- 
duction in detail. By means of the expenditure of ef- 
fort and skill one person or a group of persons produces 
something which may be used by the producer or which 
may be disposed of to some one else. In that sense pro- 
duction involves procuring from nature, or making from 
raw materials found in nature, some object of utility 
(including also beauty), or controlling in some way 
natural energy in the form of falling water, electricity, 
or the like. 

The other aspect of production affords a view of the 
aggregate of products or of some series of products with- 
in a community or a nation. It is clear that the latter 
view can present itself only to the mind. We can never 
see the total production of any nation, nor can we easily 
grasp the extent of it from any statistics, even where 
these are available; but it is important to realize that at 
any particular moment, there is in being such a total of 
the material means of existence. 

This total is subject to practically continuous altera- 
tion. Every moment some of it is withdrawn for con- 
sumption and every moment more of the same kinds of 
product are added. In all organized countries this 
stream of consumable goods, some of them carried great 
distances from the point of production to the point of 
consumption by practicably innumerable voluntary 

11 



n ECONOMICS 

agents, each of them remunerated for the service which 
he renders, is essential to the existence of the commmiity 
as an organized group of people. 

If the stream of consumable goods is steady, economic 
life goes on smoothly; if for any reason the stream is 
interrupted, more or less serious consequences ensue. It 
is obviously important for the well-being of the nation 
that the quantity of consumable goods should increase 
in at least the same proportion as the population and 
that these goods should be susceptible of being moved 
to places where effective demand for them exists. This 
may perhaps best be illustrated by the case of a district 
rather than by that of a nation. In certain provinces in 
Russia, details being for present purposes unimportant, 
there is a certain annual average yield of grain per fam- 
ily. This annual average yield is insufficient to provide 
the amount of grain which is regarded by medical experts 
as the minimum amount requisite for the support of an 
average family. It is thus necessary even in average 
years to send supplies of grain into the locality. Those 
peasant families which experience the greatest shortage 
of grain are obliged in years of scarcity to sell every- 
thing they have in order to buy food; some are relieved 
by the government or by subscriptions from the benevo- 
lent, some die of starvation and of disease induced by 
inferior nutrition. 

A nation cannot enjoy adequate well being unless the 
aggregate of production is large enough to enable its 
population to subsist either upon the actual products of 
the nation or upon the products of other nations obtain- 
able by means of exchange. Various censuses of pro- 
duction, notably those of Great Britain, the United 
States and Canada, give some idea of production from 
a national point of view, but no statistics do so fully. 



PRIMARY PHASES OF PRODUCTION 13 

12. TJie effect on a nation as a whole. — In estimating 
the effects of systems of production it is necessary to 
take into account as an important element their effects 
upon the national aggregate product. Thus it is not a 
matter of indifference to a countiy that its agricultural 
or its forestry methods are such as to produce less than 
might be produced by other methods; or that mining is 
carried on so unskillfuUy that great quantities of min- 
erals which might be utilized are wasted ; or that factory 
industry is less efficient than it might be; or that large 
numbers of people within the nation are less productive 
than they might be. It is also, as we shall see, a matter 
of extreme importance to a nation that the various wants 
of its people should be supplied and therefore that due 
proportions should be preserved among the various con- 
sumable commodities destined for the satisfaction of 
these wants — in short, that there should be no overpro- 
duction of some, and underproduction of other, com- 
modities equally necessary for the maintenance of life 
and for the continuance of the economic processes. 

13. Simple form of production. — Production may be 
regarded as presenting two forms — simple and complex. 
In both of these forms the end of production is the bring- 
ing into existence of something which is intended by the 
producer for some use or for several uses. 

The simplest form of production is that of manufac- 
ture in the strict sense ; that is, doing something with the 
hands. A peasant child known to the writer, desiring 
a vessel to drink out of, went to a place where there was 
a deposit of clay, took up a handful, moistened it, 
moulded it with the fingers and in a few moments pro- 
duced a rough cup which was quickly dried by the sun. 
The cup was very crude but it was made quickly by man- 



14 ECONOMICS 

ual labor and it served its purpose — in other words, it 
was an object of utility* 

Much of the pottery of primitive people was and is 
produced in this manner. The earliest lamps of the 
Mediterranean peoples appear to have been made by 
taking a piece of clay, shaping it into a round shallow 
bowl with inward curving lip and then pinching one 
part of the lip between the finger and thumb in such a 
way as to provide a place for the wick to lie in. So also 
the pottery making Indians of New Mexico formed clay 
into rope-like lengths and then wound it into the shape 
of a bowl or vase without the use of any implements 
other than the fingers. The inner bark of certain trees 
is used by the Deue of Great Slave Lake in Northern 
Canada for the purpose of making cord which is knotted 
by the fingers into fishing nets. 

14. Raw material, — Since simple production is very 
generally practised by nomads, settlement and occupa- 
tion of land is in the strict sense not a requisite of simple 
production. The only requisites are raw material and 
labor force ( the latter involving skill in its application ) . 
The raw material may be hard to procure either because 
of its scarcity in a given region or in nature generally, 
or because of the appropriation of it by the community 
as a whole or by individuals who hold it by force or by 
consent of the community — that is to say, by conquest 
or robberjr or by common or statute law. Timber is so 
scarce in extreme northern regions, that the Eskimos of 
Greenland do not permit its private appropriation in 
€xcess of actual requirements by individual persons, 
whether Eskimos or strangers. Under the Canadian 
homestead law, a settler is entitled to cut a certain amount 
of timber from the public lands ; and under various acts 
of the provinces of Canada and the States of the Union, 



PRIMARY PHASES OF PRODUCTION 15 

timber limits are granted, leased or sold and permits to 
cut timber are given on certain conditions. Access to 
minerals and licenses to fish and hmit are similarly pro- 
vided in organized societies. Unrestricted access to the 
means of production exists only where the social organi- 
zation is too weak to impose restrictions. 

15. Labor. — Even in the simplest methods of produc- 
tion, both labor force considered as muscular energy 
and the skill with which it is applied to the raw material 
vary with sex, age, aptitude and practice. A makeshift 
may be accomplished in general by any one; but skill 
in the high sense is rare. An examination of flint im- 
plements in a museum will afford evidence of very great 
difference in skill on the part of the primitive flint 
makers. Some implements are clumsy in form and ir- 
regular in flaking, in others the flaking is done with 
consummate skill and the form is perfect. The same is 
true of primitive pottery. High skill cannot be attained 
or maintained without continuous exercise, and, there- 
fore, the primitive craftsman who possesses it generally 
specializes upon some manufacture in which he has be- 
come proficient. An expert arrowmaker will make flint 
arrows for his tribe and he may do little else. 

Division of labor thus makes its appearance in a very 
early phase of human society — men and boys perform- 
ing those functions for which they show themselves to 
be best fitted and women performing other functions. 
All, however, perform certain functions in common, 
although with different powers, and the specially expert 
devote themselves to the functions for which they have 
shown themselves to be better fitted than others. The 
essential feature of the simple method of production is 
the directness and immediacy with which an article is 
produced because it satisfies an immediate want. The 



16 ECONOMICS 

need incites the craftsman to produce and he does so as 
soon as he can obtain the raw material or, aware as he is 
of the future occurrence of a need, he picks up a piece 
of material which he finds by accident, with the intention 
of one day fashioning it into some object which will 
satisfy a probable need of the future. 

16. Compleoc production. — In the simplest form of 
complex production, the product of an operation of 
simple production is utilized as an instrument in a fur- 
ther productive process. It is obvious that not all simple 
products are susceptible of being so utilized. Some are 
made for special uses, as in the case of the cup, for exam- 
ple. Others are made for ornament or for food; but 
many are made for the express purpose of facilitating the 
manufacture of other useful things. It is true that in 
many cases such things might be made by means of 
simple production, but they are more easily or more ef- 
fectively made by means of some instrument. The fact 
that this instrument has first to be made causes the first 
total process to be indirect and therefore slow; but sub- 
sequent processes are effected more rapidly than would 
be the case if the simple production process were applied 
on each occasion. Thus, for example, if a primitive 
potter, instead of fashioning a cup with his hands, makes 
a potter's wheel — a very simple apparatus — places the 
clay in the center of it, sets the wheel spinning and then 
by the dexterous use of his hands gives the clay a round 
form or such an outline as he may design, he employs 
complex production,' He has used the product of one 
operation — his wheel — to accompish another operation, 
the production of a vessel. He occupies time in making 
his wheel during which he might have made many cups ; 
but his power to produce cups in numbers per unit of 
time is for the future greatly increased and, moreover, he 



PRIMARY PHASES OF PRODUCTION 17 

can by means of his wheel produce more uniform cups 
than he could without it. 

17. Suppleme7itary requisites. — In complex produc- 
tion, at least one new requisite makes its appearance. 
This requisite is the instrument or tool by means of which 
the operation is performed in addition to the raw material 
upon which it is performed. Many such tools are made 
and used by nomadic people; but there are many more 
which can only be made and used by people who have 
definite permanent settlements. When the instruments 
which they make are of such a character, a further 
requisite makes its appearance — this requisite is the oc- 
cupation of land. The land may itself be used as an 
instrument, as in agriculture, forestry, horticulture, etc. ; 
it may be used to extract raw materials from, as in min- 
ing; or it may be used as the site of instruments, as in 
the case of land occupied by factories and the like. 

When an instrument is localized, it is necessary that 
the raw material upon which it works should be more 
or less easily accessible or should be more or less easily 
transported. Thus transportation is an indispensable 
incident in all complex production. 

Moreover, instruments or tools are used for the manu- 
facture of other instruments and so on until in the highly 
organized economic life of modern communities the trac- 
ing of origins through multifarious and complicated 
processes to remote simple products becomes an impos- 
sible task. It is difficult even to trace the origin of a 
design executed in various more or less refractory ma- 
terials to a primitive design executed by hand in some 
plastic medium. 

18. Who owns the finished p'oduct? — The product of 
a complex productive operation may be the work of 
one person who has found the raw material for the in- 

C— I— 2 



18 ECONOMICS 

strument, made the instrument, found the raw material 
for the final product and eventually produced the final 
product. In such a case, as in a similar instance of 
simple production, there could arise no question of the 
ownership of the finished product; at all events, in any 
community where such a product was regarded as right- 
fully subject to private ownership. Even among people 
who in general regard food as the common property of 
the tribe, private ownership of weapons is usually recog- 
nized. 

Cases of individual manufacture of things which are 
the result of complicated processes are not uncommon. 
In Central India, for example, some of the workers in 
iron find the deposits of native iron in the mountains, 
burn charcoal, refine the metal and make out of it tools 
customarily used in the villages. 

The processes of complex production are, however, 
usually carried on by joint or successive labors. A 
group of Russian peasants was visited by the writer im- 
mediately after they had settled in a region previously 
unoccupied. Upon their arrival the first thing they did 
was to hunt for clay. When they found it, they made 
rough bricks, dried them in the sun and on the second 
day after their arrival, they built ovens in which the 
women baked bread for the group. Meanwhile some 
of the men were cutting down trees and building large 
temporary houses each to contain several families. In 
such a case joint labor, and joint use of the instruments 
and joint enjoyment of the product were clearly ex- 
pedient. 

19. Primitive causes of disputes. — ^When joint or suc- 
cessive labors are exercised upon a series of productive 
processes of a complex character, the same questions arise 
as may arise even where the productive method is simple. 



PRIMARY PHASES OF PRODUCTION 19 

The use and the ownership may be disputed and claims 
may be advanced on the part of some contributors to the 
production, which are not admitted by the others. Where 
the labors of each and of all are necessary, it is not easy 
to settle such claims on any principle of ideal justice — 
an equal division might be as manifestly unjust as an un 
equal division which might lead to the ownership by 
one or two and the practical exclusion from use or owner- 
ship of the joint product on the part of the others. 
Here again custom and sometimes customary or statute 
law intervene to afford some basis upon which the dis- 
pute may be settled. Usually such disputes are settled 
by means of a compromise — ideal justice being unobtain- 
able. 

The germ of disputes about distribution is thus to be 
found in the process of production. As this process be- 
comes more and more complicated and as the contribu- 
tors to the productive process become more numerous, 
and as their functions become more varied, it becomes 
more and more difficult to assign the share of each in the 
product of a common activity. Only one conclusion is 
certain; if production is accomplished by several agen- 
cies, the product at the time that it is produced cannot 
rightly be regarded as the exclusive property of any one 
of these agencies. 



CHAPTER III 

FACTORS OF PRODUCTION 

20. Three divisions of labor. — The indispensable con- 
ditions of production are time and space. The contin- 
gent conditions are national security and social stability. 
The factors or requisites of simple production are mate- 
rials and labor; and, of the complex or long production 
process, and (including materials upon and within it), 
labor and instruments of capital. It has been made clear 
that these factors of production may be employed by 
one person or by many. In highly organized industry, 
materials may be assembled from many different regions 
and may be the products of numerous complex produc- 
tive operations. These materials may be subjected to 
further processes by means of instruments similarly as- 
sembled and by the exercise of labor of a diversified 
character. 

In all productive enterprises of a certain magnitude, 
labor may be regarded as being obviously divisible into 
three important categories : ( a ) directive labor exercised 
by the responsible chiefs of the undertaking; (b) super- 
intending labor — that of managers, foremen and the 
like; and (c) manual labor. The enterprise may or may 
not be socially necessary ; but its existence being granted, 
labors of all three categories are necessary to its continu- 
ance. Whatever the dimensions of the industry, the 
functions implied in these categories must be performed, 
whether by one person or by many. 

20 



FACTORS OF PRODUCTION 21 

Directive and superintending labor is as necessary 
as manual labor, entirely irrespective of the form of the 
organized group. This group may be organized by a 
single individual, by a group of partners, by a joint stock 
company, by a society for co-operative production, by 
a society for distributive production, by a municipality, 
or by the state. The form may affect the efficiency of 
the enterprise, but it does not affect the essential charac- 
teristics of its organization. 

21. Land and capital. — The other factors are simi- 
larly necessary, whatever may be the form of the enter- 
prise. In order that the enterprise may be continuous, 
the land upon which it is localized must be under the 
control of the directors of the enterprise, at least for a 
period. They must either own it or lease it. That is 
to say they must exercise the function of landholder. 
This function is actually necessary whether the land 
belongs to a private individual or to the state. 

Similarly the instruments of production, the buildings, 
the machinery and equipment emploj^ed in the industry, 
together constitute a necessary factor which may be 
called fixed capital. So, also, are the liquid funds or 
the circulating capital required to accomplish the pro- 
ductive process for which the enterprise is organized, 
through the payment of wages, the purchase of raw 
materials and the like, until the exchange of the product 
in the market avails to recoup the funds depleted by these 
expenditures. 

22. Fisced and circulating capital. — The provision of 
fiixed and circulating capital is necessary irrespective of 
the form of the organization; but the amount required 
by the industry will depend upon its magnitude and 
upon the conditions of credit granted to the enterprise 
and granted by it, as well as upon the length of the pro- 



22 ECONOMICS 

ductive process in which it is engaged. In some indus- 
tries the fixed capital is small in proportion to the out- 
put. In industries where hand labor is exclusively or 
chiefly employed or where the product is rapidly pro- 
duced and immediately salable, the amount of fixed cap- 
ital is sometimes extremely small. In those industries 
in which it is necessary to maintain large stocks of raw 
material, or materials in a partially manufactured state, 
in those industries in which the sale of the finished prod- 
uct is customarily slow, and especially in those industries 
(like ship-building) in which the process of production 
is long, the amount of circulating capital necessarily 
involved in the business is relatively great. The develop- 
ment of machine manufacture has increased the propor- 
tions borne by both fixed and circulating capital to the 
output. 

23. Sources of caintal. — In order that an enterprise 
may be continuous, it is necessary that the fixed and cir- 
culating capital should belong to, or alternatively should 
be under the control of, the organizers of the enterprise. 
They may obtain it from ordinary shareholders, that is, 
from persons who share the profits and expect to have 
to share the losses; from preference shareholders who 
give their capital permanently at a fixed rate of inter- 
est ; from bondholders who lend their capital for a fixed 
period or permanently at a fixed rate of interest; from 
bankers or others for short or indeterminate periods, also 
at a fixed rate of interest; or otherwise. The capital of 
large enterprises is customarily provided by all of these 
classes of persons and is frequently provided by people 
who live in countries distant from the locality where the 
industry is conducted. Industries in South America are 
extensively financed by people in the United States ; in- 
dustries in Mexico by people in Great Britain, the United 



FACTORS OF PRODUCTION 23 

States and Canada; industries in Russia by people in 
Great Britain, France and Belgium. 

The exercise of the function of the capitalist is not 
less necessary to the conduct of an industry, irrespective 
of its magnitude, than is the exercise of the function of 
the laborer. Where the product is small the place of 
capital is insignificant, but it nevertheless exists. 

24. Functions in compleoj production. — The functions 
which are necessarily exercised in complex production 
may be summarized thus : 

1. The innQlion oi^^e.landJiolder (individual, group 
or State ) who controls access to land for manufacturing 
sites and access to the raw materials in minerals, forests 
and the like; 

2. The function of the capitalist who possesses the 
fixed and circulating capital — the fixed capital being the 
actual products of previous productive operations, and 
the circulating capital consisting of resources for obtain- 
ing similar products and for defraying the costs of pro- 
duction during the productive process which the enter- 
prise undertakes; 

3. The function of the manual laborer who exercises 
his labor force ; 

4. The function of the superintendent or foreman who 
organizes the labor of groups of manual labor ; 

5. The function of the employer or organizer of the 
whole enterprise who interposes his credit and becomes 
responsible to landholder, capitalist, superintendents and 
laborers for the proper condition of the business. This 
person is sometimes called entrepreneur or undertaker. 

In the simplest industrial forms these functions may 
all be rendered by one person ; in the most complicated 
they may each be rendered by great numbers of persons. 
The various categories of labor, viz.: manual, superin- 



M ECONOMICS 

tending, and directive or employing, cannot be rendered 
otherwise than by persons more or less explicitly com- 
petent to exercise their respective functions; but the 
functions of landholder and capitalist imply possession 
and do not in a sense necessarily imply personal com- 
petence. The functions may in a sense be exercised by 
a child, by a lunatic or by the State; but they are not 
truly exercised by these, but rather by the persons who, 
acting in a fiduciary capacity, exercise the functions in 
their stead/ 

25. Law of increasing returr ?^—^Jt is matter of com- 
mon observation that an increase of labor will sometimes 
produce a proportionately greater result than the pro- 
portionate result produced by the previous labor. This 
is not true of all points upon an imaginary scale of labor 
and result, but it is true of all forms of effort and result 
up to a certain point. It is true, for example, of agri- 
cultural production. A given quantity of seed, a given 
quantity of manure and a given amount of labor will 
result in a maximum yield from a certain area of land. 
Less than these amounts will utilize the land to a less 
extent than the maximum, but a curve representing the 
yield would rise sharply from zero and less sharply as 
it approaches the maximum. The same is true of me- 
chanical production. A machine of a certain maximum 
power will produce its maximum only when it is fed with 
fuel, oil and raw material up to the limit of its speed. 
A curve of its output will approximate to the curve of 
agricultural yield. This is the simplest form of the oper- 
ation of the law of increasing returns. In a larger sense 
the law also acts in the expansion of industry, and its 
action is especially noticeable in those industries in which 

^The relations of the factors of production to one another are more ap- 
propriately discussed under the head of Distribution. 



FACTORS OF PRODUCTION 25 

capital is largely employed in proportion to labor. A 
factory which is on half-time produces less net return 
than one-half of its maximum because there are many ele- 
ments in its expenditure which remain the same what- 
ever the output, and there are other elements which do 
not increase quite so fast as the increased output. 

26. Reason for industrial combinations. — The eco- 
nomic justification of industrial combinations lies in 
the operation of the law of increasing returns. The 
board of directors and the staff of superior managers of 
a business employing say one thousand men, and utiliz- 
ing a capital of say one million dollars are, let us suppose, 
working at a capacity less than their maximum ; a certain 
amount of their force or skill is going to waste. They 
could, without overstraining themselves and without ex- 
pecting more than a slight additional remuneration, con- 
duct a business of twice the dimensions of the one they 
have been conducting. Another business is absorbed 
and a board and managing staff are eliminated. Other 
things being equal, if expectations are realized the com- 
bined businesses yield more than the sum of the former 
yields of the separate enterprises. 

Still another business is added en bloc and so on until 
a large industrial combination has been formed. The 
law of increasing returns would act indefinitely in all 
spheres, were it not for three important checks. These 
checks are (a) the limits of labor force and of managerial 
skill possessed by any men or group of men, (b) the lim- 
its which nature has imposed upon the availability of raw 
material and (c) the limits also imposed by nature upon 
the "fatigue" of land and of machinery. No doubt these 
limits are constantly being extended. The exercise of 
the function of labor becomes easier with increasing 
skill; the function of management on a large scale 



26 ECONOMICS 

brings into existence the organ which is appropriate for 
its exercise through the operation of the obscure law of 
variation considered in an economic sense. New sources 
of raw material are frequently discovered and improve- 
ments in the technique of agriculture and of mechanical 
industry are constantly being made ; yet the various fields 
continue to be limited, although not always by the same 
limits. 

27. Conditions which must he present. — The expressed 
or implied condition in all statements of the law of in- 
creasing return, viz. : that other things being equal, such 
and such a result will follow certain action, must be 
carefully kept in mind. What is increased is the physi- 
cal output ; the price is assumed to remain constant. In 
a statement of the law the prices of things might be left 
out of account altogether except for the fact that it 
is impossible to add together essentially different ele- 
ments like material and labor without expressing them 
in a common denominator denoting value. Thus while 
the increase of return in respect to physical output is 
limited by the supply and by skill in the application of 
means of production, the increase of return in the sense of 
value is also limited by the extent of the market and the 
movements of prices. Indeed, an increase of product, 
unless demand increases also, must induce a fall in 
price. Thus increased effort may meet with even a 
diminution of value in exchange. The case is familiar 
enough when an exceptionally abundant harvest neutral- 
izes through a fall in price the gain which might be ex- 
pected to accrue through an additional application of 
capital and labor. 

28. The law of diminishing returns. — When the law 
of increasing returns has reached the limit imposed by a 
limitation in the supply of raw material, a limitation in 



FACTORS OF PRODUCTION 27 

the supply of labor or in the powers of the laborers, or a 
limitation in the supply of the special kind of skill re- 
quired for expansion of the business, a point is reached 
which may be regarded as analogous to the "dead point" 
in a mechanical system. The output neither increases 
nor diminishes ; it remains constant. 

Many businesses reach that point and remain there for 
a long time. Efforts to fight against such a condition 
when it really exists must be fruitless or even harmful. 
If the laborer forces himself to work above his maximum 
power he breaks down and cannot work at all. If a 
machine is forced above the speed for which it was de- 
signed and constructed, it will soon become useless. If 
land is forced by fertilizers beyond its power of assimila- 
tion it will produce not increasing, but diminishing crops. 
A business having expanded to certain dimensions, if 
forced beyond these, the risks increase out of proportion 
to the profits, and if the process is continued, the business 
may come to irreparable ruin. 

Such is the law of diminishing returns. The most 
conspicuous case of its operation is to be found in the 
exploitative industries. In coal mining, for example, a 
curve indicating production rises sharply from zero un- 
der the influence of the law of increasing returns; then 
there is a period during which the yield is constant ; then 
the seams nearest the main workings are worked out ; re- 
moter seams are cut, and the maintenance of ventilation 
and underground transport of the coal increases in cost. 
As still more remote seams are attacked, the operations 
become more and more costly and difficult; new shafts 
have to be sunk and fresh seams have to be opened up. 
Eventually the mine produces less and less until aban- 
donment becomes expedient. If the area is the sole 
source of supply of coal for an industrial district, the 



28 ECONOMICS 

limitation of supply caused by the gradual exhaustion 
of the mines will tend to check the increase of return to 
manufacturing enterprises, and to extend to them the 
influence of the law of diminishing returns. 

Another conspicuous case is that of agriculture. Cul- 
tivation by means of successive doses of labor and capital 
results in increasing returns up to a certain point. 
When the point of maximum return under the new con- 
ditions of agricultural knowledge is reached, any fur- 
ther application of labor and capital would result in a 
smaller proportionate return than the previous doses. 
In other words, the law of diminishing returns would be- 
gin to be effective. 

When we come to discuss the question of rent we 
shall see that the reason for the emergence of rent lies in 
this law. If it were possible to produce constantly in- 
creasing quantities of foodstuffs by the application of 
labor and capital to a small area of land, rent for land 
for purposes of cultivation could not arise because one 
piece of land would serve as well as any other. There 
would be no differential advantage in the cultivation of 
areas of varying fertility, and therefore there could be 
no rent. Similarly multiplication of machinery would 
be useless if the product of the operation of one machine 
could be carried to infinity. 



CHAPTER IV 

TRANSPORTATION A FACTOR IN PRODUCTION 

29. Transportation as an incident in production. — 
In all productive operations transportation may be said 
to be pervasive: that is to say, that a thing cannot be 
said to be produced until it is taken out, and to be taken 
out it must be transported. In the extractive industries, 
transportation plays a very large part, especially in 
those which are concerned with heavy commodities. In 
logging operations, for example, the transportation of 
the logs from the place of the "cut" to the water is a 
necessary part of the work of logging. In heavy tim- 
ber lands this is usually now done by machinery. In 
some coal mines electrical trolley lines convey the coal 
in cars from the "face" of the cutting to the bottom 
of the pit, occasionally for two to three miles. The coal 
is then hoisted by other mechanism to the pit head. 
Transportation may thus be regarded as a special branch 
of production in which the extractive industries and the 
manufacturing industries are equally concerned. 

30. Applied to manufacturing ifidustries. — In the in- 
terior management of factories transportation is an im- 
portant matter. The arrangement of factories of mod- 
ern design and equipment is such that the amount of 
moving about of heavy material within the factory is 
reduced to a minimum. Every movement costs some- 
thing in labor, material and time. An ideal arrange- 
ment would provide for the entrance of the raw material 
at one end of the factory and the emergence of the fin- 

29 



so ECONOMICS 

islied product at the other ; or, the factory being arranged 
in a circle, at the point of entrance. 

In another sense, transportation is of the first im- 
portance in production because the most economical pro- 
duction takes place when there is easy communication 
both for the raw materials and for the finished product. 
In the case of heavy goods this is indispensable, and 
especially in the case of articles in the manufacture of 
which two or more heavy raw materials enter. In the 
manufacture of pig-iron, for instance, it is important 
that the coal and the iron ore should both be readily 
accessible. The Scottish iron fields were the first to be 
exploited by means of coal because the coal fields were 
in the immediate vicinity. The English coal and iron 
deposits are similarly close together, and the same is true 
of the Pennsylvania deposits. The Han Yang iron 
works on the Yangtse Kiang in China are situated be- 
tween iron and coal fields, each five miles distant from 
the works. 

Not less important is it that means of transportation 
should exist for the finished product. Docks and rail- 
way sidings provide such means for all large manufac- 
turing concerns. At the Han Yang works above men- 
tioned, steel rails are shipped upon ocean steamers from 
wharves at the works within a few yards of the mills, 
where the rails are rolled. 

Where means of transportation do not exist, pro- 
duction on any considerable scale is impossible. Exten- 
sive mineral deposits are reported to exist in Ungava 
and in the region to the north of the Barren Lands in 
Northern Canada; but their exploitation must await 
means of transportation of supplies into the regions, 
and of raw materials or finished products out of them. 
So, also, the coal deposits which are reported to lie under 



TRANSPORTATION IN PRODUCTION SI 

the frozen surface of the Antartic continent are value- 
less without the probably impossible provision of trans- 
portation. 

31. Is transportation wasteful? — It has sometimes 
been thought that transportation is in its essence waste- 
ful, and that the nearer the place of the manufacture of 
the finished product could be brought to the raw mate- 
rial, in situ, the better. For example, it was at one time 
proposed that gas works should be placed at the bottom 
of coal pits so that coal might be shoveled into the retorts 
from the "face." This project not merely neglects the 
human element, but neglects also the fact that either the 
gas must be transported to the city from the gas works 
at the pits, or that the city must be brought to the 
mines. 

As a rule, transportation either of the raw materials 
or of finished products is necessary. The cases w^here 
the product is made and consumed on the spot are those 
in which, for example, the products of the garden are 
used in the household, and where the community is prac- 
tically self-contained. Wherever the community pro- 
duces a surplus of any commodity which it exchanges 
for some other, or which it sells in the market, the com- 
modity must be transported. The opening up of the 
means of transportation is one of the indispensable in- 
cidents in the organization of economic life. 

32. Methods of transportation. — Methods of transpor- 
tation vary greatly. In Korea men carry enormous 
burdens upon their backs, sometimes fastened upon huge 
frames. In Japan a large part of urban and much 
of interurban transportation is effected by means of 
human labor in the jinrikisha, the chair and the kaluza 
or portable hammock. In Cliina most of the goods which 
are moved by land from one place to another are moved 



32 ECONOMICS 

by the wheelbarrow. Wherever, as in all of these coun- 
tries, animals are scarce and costly, human transporta- 
tion is the rule. 

Camels are used extensively in Northwestern China, 
in Transcaspia, in Egypt, in the Soudan and in the 
Arabian desert. Oxen are used in South Africa, India, 
Italy, Germany, extensively in the province of Quebec 
and occasionally in the Prairie provinces. Horses, mules 
and asses are used everywhere excepting in the south 
of China, where animals are rare. 

In countries where there are great interior waterways, 
Hke China, Russia, Holland, Canada and the United 
States, a large part of the movement of goods and per- 
sons in these countries has been accomplished from the 
earliest times by means of small boats and rafts. Rafts 
may be seen in great numbers on the Danube and on the 
Rhine, and occasionally on the Canadian rivers. A more 
usual method now is for logs to be enclosed in booms 
in the form of a "bag" and for the mass to be towed 
by a steamer. Immense bags of this kind are often to 
be seen on the Great Lakes. Dug-out canoes may still 
be seen on the Dnieper, for example. 

The prairie trails of modern times are similar to the 
early roads of all scantily peopled countries. They are 
not constructed in any sense and they cost nothing for 
maintenance because they are not maintained. The 
great roads of early times were military roads, although, 
of course, they were used for commerce. Many Roman 
roads are still in use in Southern Europe and in Great 
Britain. 

The practice of merchants who transported their goods 
by land in Europe, until the middle of the nineteenth 
century, was to form large caravans composed of many 
carts, sometimes accompanied by an escort. The 



TRANSPORTATION IN PRODUCTION S3 

Hudson Bay Company imitated this practice. Every 
year until the Canadian Pacific Railway reached Win- 
nipeg, the company sent out from Fort Garry a bri- 
gade of some two hundred Red River Carts which car- 
ried a large part of the total annual quantity of furs 
to St. Paul, through which they were sent to London. 
At the present moment there may occasionally be seen 
on the Northern Canadian prairies a train of "freighters" 
or wagoners carrying supplies to settlements remote 
from railway communication. These "freighters" are 
generally metis or half-breed Indians. Prior to the in- 
vasion of the Canadian Northwest by the railway, the 
"freighters" carried on the whole business of transporta- 
tion. The distm'bance of their economic equilibrium by 
the railway was one of the causes of the Second North- 
west Rebellion. 

The improvement of the main roads throughout 
Europe and Great Britain towards the beginning of the 
railway epoch brought transportation to a high pitch of 
perfection. The service of the past was well organized ; 
by means of this service it was possible for travelers to 
proceed at any hour and to travel day and night at the 
rate of from 80 to over 100 miles a day, according to the 
state of the roads and the character of the vehicles and 
the horses. 

During the eighteenth century, also, canals were con- 
structed connecting the rivers and lakes and providing 
for the transportation of heavy goods. The railway and 
the steamship, coming as they did practically together 
in the second quarter of the nineteenth century, revolu- 
tionized transportation in respect to time. Except 
in this sense, technical progress did not greatly dimin- 
ish the cost, saving only when great distances had to 
be overcome ; but they added greatly to the convenience 
C— I— 3 



34 ECONOMICS 

of traveling and rendered it less fatiguing and, in gen- 
eral, less dangerous. 

The economic effects of the improved means of com- 
munication were due principally to the saving of time 
which they rendered possible. This saving of time 
meant an increase in the velocity of the circulation of 
capital, and increased velocity of the movement of capi- 
tal had the same effect as an increase in its amount, 

33. Opening new markets. — When a new transporta- 
tion route enters a rural district previously unserved, 
except by primitive means, it opens up new markets for 
produce and therefore tends to increase local prices for 
that produce because it brings into the field new areas 
of demand. But a new transportation route opens up 
opportunities for competition by external traders with 
the local merchants, and thus tends to diminish the prices 
of goods which are subject to external competition. 
Merchants in small country towns have often protested 
against cheap weekly fares being announced by railway 
companies on the ground that these induced their cus- 
tomers to go into the larger towns to do their shopping. 
In §ome cases the railway companies have withdrawn 
the low fares in consequence of these representations. 

In the market centers connected by a new transporta- 
tion route with the rural districts through which the 
route passes, the prices of produce tend to diminish be- 
cause of the new areas of supply which are brought into 
the field by means of the railway. 

The gradual development of transportation systems 
through the steamship and the railway served by and 
interlocking with more primitive means of communica- 
tion has resulted in a complicated network of agencies 
which brings the produce of the incessant labors of 
Chinese, Japanese and Hindu peasants to every table 



TRANSPORTATION IN PRODUCTION 35 

in Europe and America, takes the produce from the 
farms in the United States and Canada to Europe and 
carries the manufactures of Europe all over the world. 

34. Efect on labor and capital. — The development of 
transportation has considerably increased the mobility of 
labor as well as the mobility of capital, and has in this 
way reacted both upon production and distribution. It 
has enabled labor with the aid of capital to reach natural 
resources which could not otherwise have been reached, 
and it has given the laborer a wider market than he other- 
wise would have had. With improved means of com- 
munication, wages advance in rural districts, although 
from the same cause they decline in urban centers. 

35. Effect on land. — So, also, improved communica- 
tion tends to increase the value of rural land until the 
price rises to a height which checks immigration and even 
sometimes causes emigration. Thus the increase in the 
value of the land in the Austrian provinces of Galicia, 
Bukovina and Ruthenia, largely owing to the low rail- 
way rates on the Austrian railways, was an important 
cause of the emigration from these provinces to Canada 
which began in 1895, and which has continued more or 
less actively since that date. 

36. Effect on rents. — Improved communication be- 
tween urban centers and immediately surrounding sub- 
urban regions checks the advance of rents in towns, and 
increases rents in the suburban districts. One of the rea- 
sons for the rise of rents in the Canadian towns which 
has been manifest, especially since 1901, is the inferior 
development of radial systems of transportation as com- 
pared with the development of the street railway within 
the city boundaries. The growth of the street railway, 
which began with the horse-car in the sixties of the nine- 
teenth century, was enormously increased by the applica- 



36 ECONOMICS 

tion, fii'st of mechanical and afterwards of electrical 
power. The street railway has rendered possible the 
spreading- out of the American city over a wide area, 
and has thus delayed the complete adoption of the tene- 
ment-house system with great advantage to municipal 
hygiene. 

Among the economic effects of the development of 
urban transportation have been the great advance in the 
price of land in the centers of cities^ an increase also in 
the outskirts within and immediately beyond the mu- 
nicipal boundaries, and a considerable diminution in the 
value of land in the intermediate areas. This last is tem- 
porary because as the population grows round the cir- 
cumference and as the utilization of the central areas 
raises the price of land in these, the inner ring of "dead 
land" will be gradually encroached upon, and its value 
must advance. Such movements in the prices of land, 
however, depend not exclusively upon the improvement 
in transportation ; this, indeed, is in all cases only a con- 
tributory cause. Other causes of the fluctuations in the 
value of land are discussed elsewhere. ( See Part III ; 
Chapter VII.) 



CHAPTEK V 
FIRST STAGE IN PRODUCTION 

37. Stages in the process of production. — The first 
stage of any example of production is the stage in 
which the raw material is obtained from nature. This 
stage is that of exploitation or extraction. Large 
groups of industries are engaged in bringing minerals 
out of the ground, in cutting down tim^ber, and in agri- 
culture. These are the chief exploitative or extractive 
industries. 

When commodities are produced up to this point, 
they are then subjected to the stage of manufacture. 
The waste material is disj)osed of and the commodity, 
after having passed through various manufacturing 
processes, makes its appearance as finished goods. The 
stage through which they have just passed is the sec- 
ond or manufacturing stage. 

While the goods are being produced they are in 
more or less frequent need of movement ; raw materials 
are not necessarily manufactured into finished goods 
on the site of their extraction from nature. Raw ma- 
terials and goods partially or wholly finished require 
to be transported from one place to another as a more 
or less indispensable incident of their production. 
Hides, for example, are transported from Argentina 
to the United States and Canada. In the latter coun- 
tries they are tanned and afterwards sent to England for 
finishing when the leather is required for certain pur- 
poses. After having been finished they are imported 

37 



38 ECONOMICS 

into the United States or Canada and are there made 
up into Gladstone bags and leather goods of a like char- 
acter. In such a case transportation enters largely into 
production. 

When goods are finished they must be placed upon 
the market, and we may regard the third stage of pro- 
duction as the marketing stage. This stage also in- 
volves transportation and sometimes involves as well 
the services of intermediaries apart from the service of 
those who have been actually engaged in production. 

38. Eocploitation or the extractive stage of pj'oduc- 
tion. — The raw materials of all products are obtained 
from the land, from the water or from the air, or, in 
other words, from nature. In the language of economic 
writers the expression "land" is used as synonymous 
with "nature." This usage arose from the circumstance 
that the early economists were inhabitants of countries 
the predominant occupation of which was agriculture, 
and thus land and nature were regarded as identical 
and the term "land" was held to include all the resources 
of nature. In the process of eccijloitation, the minerals, 
the plants (including trees), the fish, and sometimes 
the gases of the atmosphere, are taken from the places 
in which they are found in nature and moved to more 
or less distant places where they become the raw ma- 
terials of further processes of production. 

Perhaps the most important incident in what has been 
called the "ascent of man" is his harnessing of the forces 
of nature — as mechanical, chemical or electrical en- 
ergy — and the exploitation of nature by means of these 
forces. 

In all ages, knowledge, or science, has played a great 
part in this exploitation, and no doubt knowledge has 
sometimes been used for the purpose of exploiting la- 



FIRST STAGE IN PRODUCTION 39 

borers as well as materials. The movement of great 
masses of stone from quarries and their use in the erec- 
tion of monuments or parts of buildings were probably 
accomplished in early ages bj^ means of inclined planes, 
the stone being rocked up the inclines on large wooden 
cradles. Models of these cradles have been found in 
Egyptian tombs. The inclined plane is still used in 
Japan for rolling up to roofs of temples under con- 
struction the heavy timbers required. 

Manual labor undoubtedly played by far the largest 
role in antique production ; but the universal prevalence 
in ancient times of stories of magicians v/ho performed 
marvels suggests that there were at least some who 
knew how to utilize natural forces, and who, from mo- 
tives of prudence, of avarice or from a mere love of mys- 
tery, kept their knowledge for their own advantage. 

39. Agriculture an exijloitative industry. — By far 
the most important of the exploitative industries is ag- 
riculture. To many economical philosophers in differ- 
ent ages, it has indeed appeared as the only productive 
occupation, all other occupations being regarded as de- 
rivative. Throughout the middle ages the great central 
plain of Europe and a great part of Great Britain were 
occupied by agricultural communities. The much-dis- 
puted questions of the origin, structure and status of 
these communities cannot be discussed here. 

As the middle ages drew to a close the cultivator in 
practically the whole of the region was struggling for 
freedom from burdensome obligations. These obliga- 
tions were partly personal — that is, he was obliged to 
render personal service; they were partly of a police 
character — that is, he could not leave the land which he 
cultivated; and partly of a commercial character — that 
is, he was obliged to pay in kind or in money to his 



40 ECONOMICS 

owner or to the owner of the land a more or less definite 
quantity of goods or amounts in money. Under this 
triple obligation, medieval agriculture was conducted. 
The system was sometimes very oppressive ; at all times 
it was subversive of human liberty and personality ; but 
it was not unproductive. The peasant was inured to 
hard labor. 

40. Passing of compulsory cultivation. — The tran- 
sition from the obhgatory phase of cultivation to a 
contractual or commercial phase took place in different 
countries at different epochs. By the end of the four- 
teenth century in England obligatory cultivation had 
practically passed away; and the class of free hired la- 
borers had made its appearance. In France compulsory 
cultivation did not pass until the revolution swept it 
aside ; in Germany it remained until the beginning, and 
in Russia until the middle, of the nineteenth century. 
Obligator}^ cultivation in the case of negroes remained 
in the Southern States until the close of the Civil 
War. 

The system of obligatory cultivation of land had two 
sides. While the peasant was obliged to cultivate and 
was not permitted to leave the land allotted to him, the 
owner of a peasant could not as a rule remove him 
from the land. There were exceptions in practice to this 
rule. In Russia, for example, peasants were sometimes 
sold without land, although the practice was always dis- 
couraged and sometimes prohibited by the government. 
The owner of the peasant had also his series of obli- 
gations, not merely to his superiors and to the state 
but to the peasant. The performance of these obliga- 
tions was not invariably enforced; but the theory was 
that the owner of peasants was responsible for them. 
If a deficient harvest occurred and his peasants were in 



FIRST STAGE IN PRODUCTION 41 

wantj he was obliged to open his granaries to them. 
Sometimes the owner was obhged by law even to keep 
reserves of grain for such contingencies. 

41. Beginning of commercial cultivation. — The sys- 
tem decayed or it was abolished in Europe as indicated 
above ; it was succeeded by commercial land-owning and 
contractual or commercial cultivation. Commercial 
land ownership crept into being in practice, and it was 
afterward confirmxcd by statutes. 

Under the obligatory system the owner of the peas- 
ant sometimes, although not always, owned the land — • 
that is, he could sell it as perhaps he had bought it ; but 
he sold or bought subject to the important fact that it 
was occupied, often inalienably, by the peasants who 
cultivated it. When the peasant was liberated or when 
he liberated himself by running or going away, as he 
frequently did in England in the fourteenth century, 
the peasant abandoned his right to occupancy. In other 
words, he forfeited his previously recognized right to 
access to the means of production and he could only 
recover this right by paying for it. Thus the former 
owner of the peasant became the owner of the land. 
When the peasant left the land voluntarily, perhaps to 
improve his position elsewhere, his claim to the land 
lapsed, and when he remained upon the land, owing to 
the prevalence of commercial ownership round about 
him, his claim came to be obliterated by practice and law 
at variance with the older customs. 

In England the enclosures of common lands or lands 
traditionally belonging to the communitj^ added con- 
siderably to the holdings of contiguous proprietors. 
The common lands had, however, fallen into neglect as 
the character of the community altered through the 
economic changes which were in progress. Their en- 



42 ■ ECONOMICS 

closure was defended on the ground that it resulted in 
increased production. 

In Russia, under the Emancipation Acts, the peas- 
ant became the owner of a portion of the land he had 
previously been cultivating. After the emancipation of 
the peasants in Western Europe the owner of the land, 
now relieved at once of the burden and the privilege of 
joint ownership with the cultivator, could have his land 
cultivated by hiring his formerly obligatory but now 
free cultivator to cultivate it for him for fixed wages, 
the produce of the land after the payment of these 
wages belonging to the owner of the land ; or he could 
let the land to the peasant at a fixed rent, the produce 
of the land, less this rent, belonging to the peasant. 

The ownership of land formerly held under the con- 
ditions which have been described thus became commer- 
cialized, and land came to be regarded as a commodity 
to be bought and sold like any other commodity. The 
species of land worship which the agricultural com- 
munity had developed received a rude shock from the 
profanity of treating land hke the movable products 
of cultivation. Increase of the obligations of the peas- 
ants and the commercialization of land together pro- 
duced the state of mind which resulted in the numerous 
peasant revolts in France and Russia in the eighteenth 
century. The view of land as common property never 
wholly died out in any country. From the beginning 
of the nineteenth century the resumption of national 
land ownership was advocated in Great Britain, and 
later, in the seventies, the late Henry George began 
his propaganda in California. 

The characteristic economic incidents of medieval 
land ownership were obligatory labor and immobility 
on the part of the peasant. In certain phases of the 



FIRST STAGE IN PRODUCTION 4S 

obligatory systems corresponding obligations existed 
on the part of the owner, who was owner of the land 
only because he was o^vner of the peasant who cultivated 
it. The characteristic economic incidents of the mod- 
ern period of land ownership are the mobility of land 
and labor alike. The laborer is free to come and go if 
he can; land may be bought and sold, and for that rea- 
son access to it, unless it is an unoccupied wilderness, 
must be paid for by the intending occupant. Even if 
the land were nationalized, the individual cultivator 
might be denied access to it unless he were prepared to 
surrender to the community some portion of the product 
of his labor. 

42. Tribal land ownership. — Probably antecedent to 
both the medieval and the modern systems of land 
ownership there was the tribal organization under which 
the land was held by the tribal chiefs as trustees for the 
tribe. They may have had their own inherited or ac- 
quired property, but the tribal domain did not belong 
to the chiefs; it belonged to the tribe as a whole. The 
tribal chief controlled the disposition of the land of 
the tribe or clan only in so far as he controlled the 
clansmen. When the tribal relations decayed, as they 
did in Europe generally after the close of the middle 
ages, the ownership of tribal land became commercial- 
ized in the same manner as the ow^nership of land which 
had not been tribal. This process of commercialization 
went on gradually in those regions (as in the highlands 
of Scotland and in Ireland), where there remained sur- 
vivals or memories of tribal organization. As the tribal 
relations decayed the chief of the clan acquired control 
of the land, and, the former tribal obligations having 
ceased, the ownership of land became commercialized. 

43. Objection to commercial land ownership. — The 



44 ECONOMICS 

above is a rough sketch of the origin of modern land 
ownership. It explains the hostility toward landlord- 
ism of those races over which tradition has a strong hold. 
To the Irish peasant and the Highland clansman, the 
purchase and sale of land is a kind of infamy; and re- 
moval from their holdings because they did not pay 
rent was a gross injustice. But such difficulties arose 
almost exclusively in those areas, in which, from want 
of natural fertility (as in the highlands of Scotland), 
or inferior cultivation together with absence of fertihty 
(as in jome parts of Ireland), the land had little com- 
mercial value as agricultural land. 

44. Advantages of commercial land ownersliiii. — 
In those parts of Western Europe (inclutling the 
greater part of England and of the lowlands of Scot- 
land) , where the land was of relatively high fertility and 
where it had been well cultivated, the agricultural peas- 
antry found the commercialization of land-owning by 
no means as disadvantageous. The landowner, even if 
he had no means independently of his land ownership, 
was able to borrow upon the security with which his 
commercial ownership endowed him, to provide houses 
and to undertake improvements which the cultivator 
could not undertake through lack of agricultural cap- 
ital. 

The system of tenant farming thus grew gradually, 
and the greatly increased production which resulted, 
on the whole, justified the system. There was security 
of tenure during the period of the lease (in Scotland, 
generally nineteen years) and there was freedom of 
movement. The inferior skill of the agricultural laborer, 
together with the want on his part of agricultural capital, 
rendered it difficult for him upon a small holding to meet 
the competition of the large farmer, and still more diffi- 



FIRST STAGE IN PRODUCTION 45 

cult to meet that of the American farmer who, since 
the end of the eighteenth century, has been producing 
a surplus of wheat. The advantage lay with the large 
farmer who employed numerous laborers and had suf- 
ficient agricultural capital to obtain good stock, and 
with the large landowner, who had credit or means 
sufficient to provide the tenant farmer with suitable 
buildings, to effect permanent improvements upon the 
land in the form of drainage, etc. The best results, 
on the whole, appeared to be derived from farms of con- 
siderable size; and thus the tenant farmers in Great 
Britain became an important and generally well-to-do 
class, while the former class of cultivators of small lots 
either rose into the position of tenant farmers or sank 
into the position of free agricultural laborers. 

45. Decline of the European small farmer. — ^When in 
the latter part of the eighteenth century the factory in- 
dustry began, it drew its recruits largely from the lat- 
ter class because of the superior wages offered, while 
during the same period the increasing production of 
grain both in Europe and in America led to diminished 
profits from the farming industry and, therefore, to 
diminished employment of agricultural laborers. In 
the beginning of the nineteenth century there was a 
short period during which the price of wheat advanced 
greatly in England, owing to the Napoleonic wars; 
the farmers prospered, profits were high and rents rose. 
Peace changed all that and prices fell sharply, and 
about 1820 the agricultural laborer was forced into the 
industrial towns. 

Meanwhile the contemporary land system of the 
iUnited States, while different from that of Europe, 
was no more favorable to the cultivator than the Eu- 
ropean systems; yet the demand for agricultural labor 



46 ECONOMICS 

in America became urgent. High wages were offered 
and immigration began to draw off agricultural labor- 
ers from Europe. The alteration in the land system 
and the offer of free homesteads in the United States 
greatly increased the attraction to emigrants, and the 
opening up of the wheat fields of the West was the 
result. 

46. Return of the small cultivator. — The growth of 
these wheat fields meant, however, the decay of West- 
ern European agriculture for a time. The attemj^t to 
grow wheat upon land which required constant enrich- 
ment in competition with wheat grown upon land which 
required no enrichment at all, was successful in so far 
as the yield per acre of the former greatly exceeded the 
yield of the latter; but the wide area of the new land 
brought into cultivation and the aggregate production 
in spite of the inferior yield per acre drove the large 
farmer in England, for the most part and for the time, 
out of wheat growing into sheep grazing and cattle 
breeding, and the small farmer into dairying and mar- 
ket gardening. 

This condition brought the day of the small cultivator 
round again; because animals in settled countries must 
in the main be stall fed, and stall feeding involves labor 
and attention. The growth of the urban centers led to 
great increase in the demand for fruit and vegetables, 
the cultivation of which came within the means of the 
small farmer. Indeed, such cultivation appeared to be 
especially adapted to his case. 

Small holdings thus become economically advanta- 
geous. During recent years they have been advocated 
on the ground that they afford a means of preventing 
or mitigating the migration of agricultural laborers to 
the towns. 



FIRST STAGE IN PRODUCTION 47 



47. Land holding for social and political distinction. — • 
Notwithstanding the profound change in the tenure 
of the land involved in the movements which have been 
described, there remained as a survival of earlier con- 
ditions a certain distinction of a social and political char- 
acter, which attached to the holding of land. This con- 
sideration gave land possession, in the eyes of those who 
enjoyed it or desired to enjoy it, a pecuniary value 
apart from the income which was derived from the rents 
paid by the tenant farmers or from the profits of cul- 
tivation by the owners through the employment of ag- 
ricultural laborers. 

The income from land in proportion to the amount at 
which the land was valued was thus, as a rule, much less 
than the normal income from capital otherwise em- 
ployed. 

Many of the great estates were maintained not by 
rents derived from them, but from investments in urban 
property or from other sources. The social and politi- 
cal consideration attached to land ownership together 
with the law of primogeniture and the law of entail led 
in Great Britain to the accumulation of large estates, 
and thus to a quasi-monopoly of land ownership. 

Successive reforms of Parliament since 1832 have 
gradually diminished the political consideration attached 
to land ownership, and the social consideration has in 
a large measure decayed in consequence. A further stage 
in the commercialization of land ownership has been the 
result. Property in land has become more mobile, and 
many of the great estates have been broken up. The 
price of land has thus fallen in England, owing to the 
abundance of the supply and the diminution of demand 
due to the practical elimination of that portion of the 
demand arising from the desire for social and political 



48 ECONOMICS 

distinction which had been traditionally attached to the 
ownership of land, 

48. Land oxmiersliiij on European continent. — The 
course of land ownership on the continent of Europe 
has been affected by a somewhat similar course of po- 
litical change. The destruction of the aristocracy in 
France during the Revolutionarj/- period and the subse- 
quent democratization of that country commercialized 
land-owning, and the fertility of the country led to the 
development of intensive agriculture in small holdings. 
The growth of the population and the attachment of 
the people to agricultural occupations led to the splitting 
up of these holdings into minute fractions. This ex- 
treme sub-division of land has been the principal cause 
of the decline of the birth-rate in France and of the 
ulterior effects which this decline has produced. 

While a great part of the soil of France is under peas- 
ant ownership, metayer tenancies are common in the 
south. Under these tenancies the cultivator does not 
own the soil, but receives it on loan from the proprietor, 
together with agricultural implements and stock, on the 
condition that he transfer to the proprietor one-half 
of the produce. These tenancies also exist in Russia, 
where the portion of produce retained by the cultivator 
varies wdth the renting contract. They are also becom- 
ing common in the United States, and they are to be 
found occasionally in Canada. They are practically un- 
known in Great Britain. 

While large estates continue to exist in Germany, the 
management of these has been greatly im^^roved of late 
years. Scientific agriculture has been adopted with suc- 
cess, and nowhere has the art of forestry been carried 
so far. In Austria the technique of agriculture has not 
attained by any means so high a degree. The increase 



FIRST STAGE IN PRODUCTION 49 

of rents in that country has been due rather to increase 
in population and to improved transportation than to 
improved agricultural methods. In the eastern prov- 
inces of Austria the rise of rent has been checked by 
emigration to Canada and to the United States. 

In Russia rents have also risen, partly from pressure 
of population and partly from deficiency of agricultural 
technique and of agricultural capital on the part of the 
peasantry. The rise in rents has induced the large pro- 
prietors to cultivate their land by means of the applica- 
tion of scientific methods and the employment of di- 
rected agricultural labor. 

49. Cultivation of wheat. — Wheat contributes so 
large a proportion of the food of mankind that its pro- 
duction has assumed increasing importance with the in- 
crease of population. The range of the growth of wheat 
is practically co-extensive with the temperate zones both 
north and south of the equator. It is an imported 
plant in America, but it has shown a remarkable sus- 
ceptibility to adaptation in both of the American con- 
tinents. The chief wheat-producing countries in Eu- 
rope are Russia, Spain, Germany, Italy, France, Great 
Britain and Roumania. In average years Europe pro- 
duces in the aggregate very much more wheat than is at 
present produced by the United States and Canada 
taken together. In Asia, India, China and Manchuria 
are wheat-producing countries; in Africa, Egypt; and 
in South America the Argentine; Australia also pro- 
duces a surplus over the requirements of its population. 

50. In Europe and South America. — In Great Brit- 
ain and in Germany skillful breeding and cultivation of 
wheat have resulted in the increase of the yield to such 
an extent that although the area devoted to wheat pro- 
duction is much less than formerly, and although im- 

c— I— 4 



50 ECONOMICS 

migration and emigration have made heavy drafts upon 
the rural population in both countries, the production 
of wheat is great enough to supply a considerable part 
of the quantity required for consumption. 

The production of wheat in Russia has been forced 
by the monetary, fiscal and railway policy of the Gov- 
ernment. By means of differential railway rates upon 
wheat for export, and a high tariff against imported 
goods, the cultivation of wheat has been stimulated, the 
paper ruble has been rehabilitated and a great stock 
of gold has been accumulated. 

The production of wheat on large estates, by means 
chiefly of Italian immigrant laborers, has been an im- 
portant factor in the development of the Argentine 
Republic. At one time it was anticipated that con- 
stantly increasing quantities of wheat w^ould be produced 
in that country, but the comparatively restricted areas 
suitable for wheat cultivation and the uncertainty of 
the climate appear to have checked the increase. 

51. In the United States and Canada. — In the 
United States the bonanza farm has played a consider- 
able role in wheat production; but the bulk of the crop 
is after all produced upon farms of moderate dimen- 
sions, the labor upon which is exercised for the most 
part by the farmer and his family. The advance in 
the price of land, due to the exhaustion of the free home- 
stead areas and to the continued influx of population, 
has resulted especially in the Middle West in the wide 
extension of the practice of working land on shares or 
renting the land from the owner. 

The dimensions of farms in Canada vary in differ- 
ent provinces. In the Province of Quebec the typical 
farm consists of a long, narrow strip extending at right 
angles to the bank of a river. The houses of the farm- 



FIRST STAGE IN PRODUCTION 51 

ers are situated at the end of the strip on the river 
bank. Since the strips are narrow the farmhouses are 
close together. As the population has increased the 
strips have been divided, although, owing to the form of 
the original strips and to the prevalence of the practice 
of primogeniture, such division is not always carried 
far. The French Canadian youth formerly sought em- 
ployment in the New England towns ; now they are more 
extensively employed than formerly in the industrial 
centers in Canada. They also migrate from the St. 
Lawrence to northern Quebec, to Nova Scotia, and to 
some extent to the prairie provinces. Large numbers 
find employment as lumbermen in the timber limits of 
their own province and in the saw mills and paper mills. 
The agricultural technique of the Province of Quebec 
is not high, although efforts toward improving it by 
means of agricultural education are constantly being 
made. 

The Province of Ontario has practically ceased to be 
important as a wheat-producing region, the competi- 
tion of the western wheat fields having rendered the 
cultivation of wheat there relatively unprofitable. The 
Ontario farmers have therefore turned to mixed farm- 
ing and to the cultivation of fruits and vegetables. Ag- 
ricultural technique has been improved by farmers' in- 
stitutes and by the formation with the aid of the Pro- 
vincial Government of agricultural societies of a gen- 
eral and also of a special character. A large amount 
of agricultural capital has been invested in stock raising 
(horses, cattle and pigs), in dairying and in fruit grow- 
ing. Bee-keeping has also become an important in- 
dustry. 

In the prairie provinces the practical minimum is 
a farm of 160 acres, or a quarter section, the area of 



52 ECONOMICS 

a homestead or free grant. There are, however, smaller 
farms in the neighborhood of some of the towns. To 
the quarter section of his homestead the farmer often 
adds another quarter section or even more by purchase 
or by homesteading in the names of members of his fam- 
ily who are entitled to free grants. 

52. Specialist wheat fanners. — The ease with which 
wheat can be cultivated and the organization for its 
sale, due to the universality of the demand, have to- 
gether conduced to specialist wheat production both in 
the United States and Canada. The chief economic 
effects of this speciahzation may be set forth thus: 

The specialist wheat farmer is dependent upon the 
outcome of a single crop. He cannot spread his risk 
over a number of crop operations. In addition to the 
risk of the season to which all crops are more or less 
subject, there is the risk of insect pests. If one of 
these attacks his wheat, the specialist wheat farmer suf- 
fers heavy loss in the same way as a farmer who had 
the whole of his capital invested in cattle would suffer 
loss if his cattle were attacked by disease. 

The specialist wheat farmer further runs the risk of 
unwittingly taking part in overproduction of wheat. 
If this takes j)lace the price of wheat falls to an un- 
remunerative point. The specialist wheat farmer is 
dependent upon the market organization for the sale of 
his product, upon the elevator, the railway, the steam- 
ship and the bank. If the price of wheat for any reason 
falls to a low point, the farmer appears merely to be 
working for this organization, and not for himself. The 
difficulties of organizing the sale of products not in uni- 
versal demand are very great; but the economic conse- 
quences of an absence of diversified production are 
not less serious on that account. 



CHAPTEK VI 

AGRICULTURE 

53. Immobility of agricultural capital. — Agricultural 
production is less easily varied than mechanical pro- 
duction to meet the conditions of the market. In ex- 
tensive agriculture the range of products is small and 
a wide market is organized for only one or two com- 
modities, while transference of labor and capital from 
the production of one crop to that of another occupies 
at least one season. The price of oats may in one year 
yield a higher return per acre than wheat; but the con- 
ditions may be altered in the following season and they 
must be altered if every farmer sows oats instead of 
wheat. 

In intensive agriculture the range of production is 
in general wider ; but the specialized capital is frequently 
greater than in extensive farming. Fruit trees, for ex- 
ample, take a long time to come into full bearing and 
when they have done so, they cannot economically be 
rooted up and replaced by some other kind of fruit tree. 

The manufacturer has, no doubt, also his specialized 
capital, but in many manufactures it is possible more 
or less speedily to alter the character of production in 
such a way as to divert capital and labor from the pro- 
duction of commodities which are not wanted to the 
production of those which are wanted. 

The inability of the farmer to meet the conditions of 
the market as directly as the manufacturer can meet 
them is inherent in the nature of his business. Yet 
the farmer can do much. He may, for instance, procure 

53 



54 ECONOMICS 

the kind of stock which will meet the known, and more 
or less permanent, wants of the market — the kinds of 
beef, bacon, poultry, etc., which the public demands. 

The difference between success and failure may often 
lie in rapid adaptation of the means of production to 
demands intelligently anticipated. 

-(-. 54. Agriciiltural capital and credit. — All agricultural 
communities borrow. The reason for this appears to 
lie deep in the character of the farming business and 
in the character of the farmer. The farming business 
demands, as an inevitable incident, credit at least be- 
tween the period of sowing and the period of reaping. 
This period may be taken as being on the average six 
months. It is evident that either the farmer or some 
one else must make advances of the seed and the labor 
of ploughing and sowing, and must remain under such 
advances until the harvest time, when the produce may 
be expected to enable the advances to be refunded. 

But this is not all. The farmer and his family have 
to be maintained meanwhile. If the farmer has animals 
for working purposes these have to be cared for also. 
If he has animals for breeding purposes they have to 
be supported during the period of gestation. Thus, 
apart altogether from improvements upon his farm in 
respect to drainage and the like, and apart from the 
buildings which are necessary for the shelter of himself 
and his family and his stock and crops, the farmer, even 
if he receives the land gratuitously, must be provided 
with a certain amount of agricultural capital in order 
that he may carry on the business which forms his means 
of livelihood. 

- 55. Fanning a hazardous business. — The amount of 
agricultural capital which is indispensable varies in dif- 
ferent countries, and has varied at different times. An 



AGRICULTURE 55 

important cause of variation is the variable risk to which 
farming is subjected. It cannot be denied that farming 
is a hazardous business. The risk of a business depends 
largely upon the period of time over which the opera- 
tions proper to the business are carried on in relation 
to the total output of the business. 

In a factory, for example, the production of the goods 
for which it is designed may be conducted from the 
stage of raw material to the finished stage in one day, 
and, therefore (storage of raw materials and of finished 
goods being eliminated) , it may be possible to turn over 
the daily advance of capital three hundred times a year. 
The amount at risk at any one period is only one three- 
hundredth part of the annual turn over. If a fire oc- 
curred in a factory which caused it to cease operations 
for a week, six productive days would be lost, or the fire 
might be serious enough to cause a total loss for a 
whole year. 

The latter is the case of the farm. The farmer can, 
in the nature of his business, turn over his advances only 
once a year. If a storm sweeps over his fields and lays 
his grain so that he cannot reap it, if an insect pest de- 
stroys it, if a cattle disease should appear among his 
cattle, or if any like disaster should occur, he finds him- 
self in the same position as a factory owner whose fac- 
tory is thrown out of business for a whole year. 

Farming must thus be classed with hazardous trades 
from the point of view of return. Great risks require 
large reserves if continuity is to be preserved. Such risks 
can be provided for either by the frugal accumulation of 
individual reserves or by insurance. The latter method 
involves, of course, some capital to pay the premium. It 
is obviously open only to those who are able to provide 
sufficient capital for their agricultural operations, plus 



56 ECONOMICS 

the premiums of insurance upon the various risks to 
which this business is subjected. 

But the farmer, however good an agriculturist, is 
rarely a good business man. When he has a bountiful 
crop in one year, it is difficult to convince him that he 
may not have as good a crop the following year; and 
even if he realized that condition quite fully, the fluctu- 
ating nature of his business tends to make him careless 
of the future instead of more careful. There is nearly 
as large an element of gambling in farming as there 
is in mining, especially in farming which is confined to 
one crop. These conditions have resulted in the phe- 
nomenon which appears in all ages, under all conditions 
of land ownership and of ownership of capital and under 
all phases of serfdom and of freedom, namely, the phe- 
nomenon of agricultural indebtedness.^ 

5Q. Farm loans. — This indebtedness, while character- 
istic of all farming communities, is not universal within 
the communities. There is to be found in nearly all 
agricultural districts a class of farmers who are shrewd, 
frugal and avaricious, and sometimes another class 
equally shrewd and frugal but without avarice. The 
latter class it must be allowed is rare. They do exist, 
however. In the Province of Quebec, for example, the 
author lived for several months in the house of a hab- 
itant of tliis class. He had lent a considerable amount 
of money in small sums to his neighbors, and he had 
charged them only five per cent, per annum. In On- 
tario the other class was common, especially before the 
extension of branch banking into the rural districts. 
They exacted usurious rates of interest. 

' On the universality of agricultural indebtedness see, e. g.. Sir F. A. Nichol- 
son's "Report on Land and Agricultural Banks in the Madras Presidency," 1895, 



AGRICULTURE 57 

From these classes the neighboring farmers borrow 
when they must, and when they can. They also borrow 
under similar circumstances from professional money 
lenders, from private bankers, from loan companies and 
from the regularly chartered or authorized banks. The 
large farmer who possesses some agricultural capital 
and an established position in the community has in gen- 
eral little difficulty in securing what money he wants 
for agricultural purposes, but the small farmer is in a 
different position. His needs are smaller than those 
of the large farmer, but he has little effective demand 
behind those needs because his resources are slender. 
His borrowings are therefore small, and his security or 
credit doubtful. Like the higher cost of anything when 
purchased in minute instead of in wholesale quantities, 
the cost of capital in small amounts is relatively 
high. 

It does not, however, cost a large individual amount 
for the provision of agricultural capital so-called. Yet 
in many countries the provision even of this small 
amount is a matter of great difficulty. The smallness of 
the amount which it is necessary for a farmer to possess 
or to procm-e, in nearly any country, is very striking. In 
the northwest of Canada an European peasant accus- 
tomed to make the most of his small capital would think 
that he had an extremely favorable start if he had $250 
to begin farming with upon his 160 acres of homestead 
land. He could not cultivate all his land with his capi- 
tal, but he could cultivate as much as is customary for 
the first year of occupation. With this amount, which 
indeed is relatively high, the capital required under 
homestead conditions might be put at $1.50 per acre. 
The conditions vary according to the land and according 
to the personal requirements of the farmer. 



58 ECONOMICS 

57. The farmer inevitably a borrower. — The amount 
of capital which is indispensable must be obtained, and 
the farmer is thus inevitably a borroY\^er from the begin- 
ning of his enterprise. ]\ioreover, the farmer frequently 
borrows not merely m^oney but stock and implements. 
For these he pays in interest a high price. Even where 
the implements are nominally his own, he has really em- 
ployed his credit to procure them and has paid a high 
rate of interest for the accommodation. 

In the Northwest Territories of Canada, prior to about 
1890, the then small farming community was seriously 
handicapped by the practice of borrowing. Interest for 
sums of moderate amount up to two per cent, a month 
was not uncommon. The gradual extension of the 
branch banking system has eliminated the private banker 
either by competition or by purchase of his business by 
a chartered bank. Such rates are therefore unknown 
for "good" loans. In France, Germany and Italy usu- 
rious loans are still prevalent. Enormous rates which, 
however, are usually not recoverable in the courts of law 
are sometimes extorted from the unfortunate peasants. 

58. Evil of usurious rates. — Where usurious rates are 
charged the farming community rapidly declines into 
a condition of debt dependency. The position of the 
farmer becomes little better than that of a serf to his 
money lender. This has been almost literally the case in 
Italy, where sometimes a peasant enters into a contract 
not only to pay a certain amount of interest in cash, 
but even to render one or more days of labor a week to 
his creditor and, in addition, to supply him with vege- 
tables without payment. Such incidents are precisely 
the same as those by which the serf discharged his obli- 
gations. Partly owing to the revivification of Southern 
Italy through the savings of Italian emigrants to Amer^ 



AGRICULTURE 59 

ica, and partly owing to tlie institution of co-operative 
credit banks (which will be hereafter referred to), the 
practice of usury has been greatly diminished. 

N^ot the least of the evils of usury is the practice 
(many examples of wliich have been exposed in the law 
courts) of inducing farmers to borrow in order that 
they may thus eventually pass into the power of the 
usurer. While these practices undoubtedly exist, the 
general effect of an usurious interest rate is to deter bor- 
rowing and to stimulate saving, if only for the purpose 
of keeping out of the usurer's clutches. 

A contrary and highly undesirable effect appears 
from the provision of too great facilities for borrowing, 
or too great extension of credit. In consequence of 
the oppressiveness of usury practiced by private lenders, 
land banks and similar banking corporations have been 
established in several countries in Europe, generally by 
means of funds supplied x^artly by the state and partly 
by enthusiasts for social reform. The results of the in- 
creased facilities for borrowing and of the reduced rates 
at which money might be obtained have been an enor- 
mous increase in the number and amount of registered 
loans. It may be observed that under the former con- 
ditions loans were not so frequently registered, many 
of them being made on personal security only. There 
can be no doubt, however, that an extensive increase in 
indebtedness in the small farming communities has taken 
place. 

59. Speculation the result of easy borrowing facilities. 
— In the northwest of Canada facilities for borrowing 
have enabled the farmers to become extensive land hold- 
ers. The increase of immigration and the increasing 
value of land have induced them to mortgage their im- 
proved homesteads in order to purchase land which they 



60 ECONOMICS 

hold for speculative purposes. They have usually insuf- 
ficient agricultural capital to utilize the additional areas, 
and they could with difficulty find the labor to do so 
even if they had sufficient capital. 

In most cases the land is purchased from the railway 
companies out of their land grants, and is payable by 
instalments. The farmers are thus driven to save out 
of their j^early income an amount sufficient to meet 
these instalments, the currency of which is usually ten 
years. The optimism which is characteristic of the 
northwest has in many cases led the farmers to enter 
into obligations to meet which an uninterrupted series 
of highly successful years would be necessary. 

60. Farm mortgages. — Mortgage loans upon im- 
proved land are customarily effected through loan com- 
panies and so-called trust companies, of which there are 
a great number, most of them having their headquar- 
ters in Montreal and Toronto. These companies in gen- 
eral will lend upon first mortgage upon improved land 
(i.e., land a certain proportion of which has been brought 
into cultivation and upon wliich farm buildings have 
been erected) an amount equal to about $1,000 for each 
quarter section of 160 acres. This rule, which is fl^exible 
according to conditions, the amount seldom, exceeding 
$1,000, and occasionally falling short of it, applies in 
general to ]Manitoba, to the greater part of Saskatche- 
wan and to Northern Alberta. 

The usual rate upon such a loan is seven per cent. 
Since recovery of interest or principal by process of law, 
should this be necessary, is more expensive in outlying 
districts than in those near the centers of population, 
the rate is sometimes higher in these districts. In dis- 
tricts where crops are uncertain, owing to deficient rain- 
fall even in normal seasons, such companies will either 



AGRICULTURE 61 

not lend at all or will only lend at relatively high rates, 
which really include a large premium of insurance 
against loss through inferior harvests. 

61. Situation in Canadian Northwest. — The compar- 
atively abundant harvests which have been reaped in 
the northwest during recent years would undoubtedly 
have placed the western farmer in a sound position 
financially had he refrained from going into the business 
of land speculation. It is true that further immigra- 
tion may enable him to sell his surplus land at a profit, 
but meanwhile he is rich in land and poor in money. It 
is true, also, that many of the mortgage investments of 
the lending companies have been placed at long dates, 
and that so long as the farmer can maintain his interest 
payments his mortgages need not be the cause of ruin- 
ous loss to him, providing his speculations have not been 
excessive, even though he may not have a continuous 
series of abundant crops. 

The solvency of the western farmer appears, however, 
in general to rest upon the maintenance or upon an in- 
crease of the price of land, because the speculative de- 
mand to v/hich the farmicr has himself largely contrib- 
uted has anticipated an increase in the price through de- 
mand arising from new immigrants. 

The growth of the towns in the northwest has not 
been due exclusively to the growth of the farming re- 
gions about them, but has been due largely to the fact 
that so large a proportion of the immigrants have not 
been farmers. The demand for labor for railway con- 
struction has provided means of employment for large 
numbers of these town-dwelling laborers, and so also 
has the periodical demand which arises during har- 
vest time. The latter demand, though not continuous, 
is annual. The former, however, is liable to suspension 



62 ECONOMICS 

whenever the railway companies suspend their policy 
of constructing branch lines. The three main lines of 
railway are almost completed, and further multiplica- 
tion of these is unlikely for many years, but the build- 
ing of branch lines may go on indefinitely. When the 
Canadian Pacific Railway was finished to the coast, the 
population which its construction attracted rapidly 
melted away. This phenomenon is not likely to occur 
to the same extent when the Grand Trunk Pacific and 
the Canadian Northern Railways have completed their 
main lines, but some disposal and redistribution or even 
emigration of the large population employed in their 
construction may be counted upon. 

62. Crops as security. — In the Canadian Bank Act 
(1913) there is a provision which enables the chartered 
banks to lend money to farmers upon the security of 
their crops. This provision may only explicitly legalize 
a practice already previously in vogue. A bank might 
at any time lend a farmer or anyone else money on his 
j)ersonal security only, and the fact of the existence 
of the crop might be an important element in the deter- 
mination of the bank as to whether the loan should be 
made or not. Yet the new provision enables the bank 
to take from the farmer a lien upon his crop. If this 
were to act as an inducement to the farmer to borrow 
when otherwise he might not do so, the provision might 
be very injurious to his interests. If the provision had 
the effect of enabling the bank to secure a lien upon all 
the movables of the farmer, although there was nothing 
to prevent the proceeding in the earlier acts, the mere 
existence of the provision might militate against the 
farmer's general credit. In any case, the provision does 
not appear to increase agricultural credit in any way — 
although it might in certain cases give the bank a pref- 



AGRICULTURE 63 

erence over other creditors which it would not otherwise 
have possessed, and in that respect either diminish rather 
than increase the credit of the farmer, or render the 
bank the farmer's sole creditor. 

63. Co-operative agricultural credit. — During recent 
years in the United States, provident loan associations, 
which are societies of mutual credit, appear to have 
to some extent replaced the private usurer and the 
pawnbroker. The rate of interest which these associa- 
tions find it necessary to charge is not low. They find 
that the small size of the transactions involves relatively 
heavy costs. Whether the poor buy goods or money, 
and whether they buy in the open market or in subsi- 
dized semi-benevolent institutions, they have to pay 
more than the rich because they buy in smaller quanti- 
ties. 

Systems of co-operative credit have had wide advo- 
cacy and, indeed, also successful development in Europe, 
especially in Italy and in Germany. They have been 
advocated for the purpose of replacing the village usurer 
by a bank sustained by a co-operative lending society. 
The chief advocates of the sj/stem of co-operative credit 
banks have been Professor Schulze-Delitsch, whose 
humanitarian enthusiasm has been the mainspring of 
conservative social reform in Germany for many years, 
and Mr, Raffeisen, burgomaster of Flammersfeld. 

The co-operative credit bank as suggested by Raf- 
feisen is a very simple organization. The members of 
the society pledge their credit jointly, receive deposits 
and loans, and lend the money among themselves. 
There is no share capital and there are no dividends. 
The liability of each member of the group is unlimited. 

The system on the whole seems to have v/orked well. 
In the form described or in other similar forms it has 



64 ECONOMICS 

been adopted in Germany, and in Italy, where usury 
was even more prevalent than in Germany, and it has 
been adopted on the strong recommendation of Sir F. 
Nicholson in the Province of Bengal and in the Punjab 
in India. 

The success of the system in Germany and in Italy 
may be ascribed to three causes: (a) the prevalence 
of excessive usury in both countries; (b) the absence 
of banking facilities of a regular character, especially in 
the rural districts; and (c) the greatly increased pros- 
perity of Germany in consequence of the development 
of industry, and in Italy, in consequence of the revivifi- 
cation of the country through the savings of Italian 
emigrants to America. 

In India, also, the prevalence of village usury offered 
favorable conditions for a reorganization of credit on 
a commercial basis, and the minute amounts involved 
in the loan transactions rendered voluntary and unre- 
munerated management indispensable. The establish- 
ment of co-operative credit among very poor peasants 
is unquestionably a sound and wise measure. 

It is, however, questionable whether the system of co- 
operative credit is susceptible of wide extension in coun- 
tries where the conditions are different from those of 
the countries in which it has been successfully estab- 
lished. 

64. Usury gradually vanishing. — In the United 
States the competition of banks has probably almost 
totally eliminated usury, so far as the provision of agri- 
cultural capital is concerned; in Canada we have seen 
that usury existed and perhaps in remote places still 
exists; but it is by no means common. The facilities 
afforded by the chartered banks have undoubtedly on 
the whole rendered the business of the usurer very hard 



AGRICULTURE 65 

to conduct. When the chartered banks began to open 
branches in the Northwest the private bankers and the 
well-to-do money lending farmers grumbled at the fall 
in the local rate of interest. They found it was im- 
possible to make a living from money lending in com- 
petition with the banks. The banks took at once all 
the good accounts and left the doubtful accounts to 
the money lenders. The competition of the Canadian 
chartered banks has resulted in their establishing 
branches in the Northwest in every direction. Practi- 
cally wherever there is an elevator there is a bank. 

Moreover, in those countries in which the co-operative 
credit system has been found to be successful, there is 
no development of credit institutions such as the 
loan and trust companies to which reference has pre- 
viously been made, nor is there such extension of trade 
credit as is to be found in a country Hke the North- 
west of Canada, for example, where a farmer pos- 
sessing improved land is urged to accept credit by the 
vendors o'f agricultural machinery who compete for his 
trade. 

Co-operative credit v^dthout the organization of co- 
operative credit societies in any formal manner is, how- 
ever, not unknown in the Northwest. Farmers who are 
well acquainted with one another, and who desire credit 
for the purchase of seed or implements, spontaneously 
form groups for mutual credit. They draw a promis- 
sory note for a certain amount due at a certain date, 
generally after the harvest, for a sum which represents 
the aggregate of their requirements, and each member 
of the group signs this document and receives his share 
of the proceeds. The wTiter has seen in the branch 
banks in the Northwest of Canada notes of this kind 
with a hundred names attached to them. If the lead- 
c— I— 5 



66 ECONOMICS 

ing members of the group are known to the man- 
ager of the local branch of a chartered bank, there is 
usually no difficulty in discounting the note because 
each of the drawers is jointly and severally liable to 
the extent of his means for its payment. This form of 
co-operative or mutual credit is very common and has 
greatly facilitated the establishment of many of the for- 
eign settlements. 

65. Co-operative loan societies less necessary than for- 
merly. — Since 1896 the Northwest has been borrowing 
heavily from the East, and through the East from Eu- 
rope. Further extension of credit may be necessary, and 
an increased number of credit institutions may be neces- 
sary also; but the professionalization of banking in the 
United States and Canada has rendered it less necessary. 
It is now much more difficult to establish small local 
credit societies whose powers of obtaining capital at 
lower rates of interest than the rate of chartered banks 
and loan companies must be limited. JMoreover, the 
credit system of the country is on the whole so well or- 
ganized and is subject to so effective competition that 
local co-operative credit associations would be likely to 
procure only the doubtful business, or that business 
which the banks and loan companies would not care to 
have because of the risks involved. They might thus 
serve some who are not now served; but the absence of 
the more certain and profitable accounts would probably 
prevent their business from being large enough to allow 
for the losses they might sustain by pursuing a policy 
of generous lending. 

Moreover, the farmers all usually require advances 
at the same time. The provision of these funds taxes 
the resources of the banks, although they have access to 
the international money market; it is difficult to believe 



AGRICULTURE 67 

that the local co-operative associations would be able, 
in times of stringency, when money is most in demand, 
to compete with the banks in procuring funds, or would 
be able to deal in any serious manner Vvitli a situation 
involving real scarcity of money. When money is 
wanted for the movement of the crops many millions 
are necessary. 

66. Marketing farm produce. — The fundamental 
characteristics of marketing are the subjects of subse- 
quent treatment under the head of Exchange; the fea- 
tures which should be dealt v»dth here are those which 
relate to the organization of the movement of agri- 
cultural produce from the hands of the farmer to those 
of the consumer irrespective of the numerous changes 
in ownership of the produce during the period of that 
movement. 

When the farmer has harvested his grain, he may, to 
begin with, set aside a certain quantity for seed and 
a certain quantity for the consumption of his family. 
Both of these quantities are in a sense fixed. The 
farmer will, under normal conditions, sow at least as 
much seed in any particular year as he sowed the pre- 
ceding year, and the amount of grain required for his 
family and for the animals upon his farm is similarly 
determined by the number of these and by the character 
of the consumption. The surplus of grain wliich re- 
mains is the quantity which is available for sale. This 
at all events is the case under normal farming condi- 
tions. 

If there is a deficient harvest there may not be any 
surplus for sale, if the deductions mentioned are based 
upon the requirements of the preceding year. Under 
these circumstances the farmer will probably dispose of 
some of his live stock in order to save grain, and per- 



68 ECONOMICS 

haps even diminish the consumption of grain in his fam- 
ily by substituting some other foodstuff/ 

When a surplus accrues the farmer has to choose be- 
tween selling it immediately after harvest or keeping 
it. In the former case, where the market is a restricted 
one, the farmer sells his grain at the period of the year 
when grain, being in abundant supply, is normally at its 
lowest price. In the latter case the farmer incurs the 
risk and cost of storage. Under the existing conditions 
the grain market is not restricted ; it is, on the contrary, 
world wide, and the seasons of harvesting in different 
countries do not coincide. Thus the period of harvest 
in one country, or even in many, may not be the period 
of lowest price. When the farmer holds his wheat he 
runs the risk of obtaining a lower price, although he 
also has an opportunity of obtaining a higher price 
should the market advance. 

If, however, the farmer decides to sell his wheat im- 
mediately after harvest he must take it to the railway 
station. In the Northwest of Canada this is sometimes 
a serious undertaking. The roads are often in bad 
condition at this period, and if the distance is consider- 
able, twenty-five miles for instance, the farmer will need 
to weigh the advantages of keeping his horses at the 
plough, utilizing the fine days of the early fall for the 
purpose of ploughing, against the advantage of getting 
his wheat to market. He has to consider that later in 
the season he cannot plough, and the roads will be in 
good condition after the first touch of autumn frost. 
But if he decides to wait he must not wait too long; 
for after the beginning of November he will find it dif- 
ficult to get his wheat out to the Great Lakes before 
the close of season. 

' See remarks and illustrations in Part IV on Consumption. 



AGRICULTURE 69 

67. Establishing wheat 'prices. — If, however, the 
farmer does decide to "team" his grain at once to the 
railway he has a choice of two methods of disposing of 
it. He may send it to local flour mills to be ground on 
his own account or he may consign it to agents in Win- 
nipeg, in Duluth, in Buffalo, or in Liverpool, for sale 
also on his own account. Wliichever method he adopts 
he will have to run the risk of the price at which his wheat 
will eventually be realized. Under the Manitoba Grain 
Act, the farmer can, by giving notice to the railway com- 
pany, be sure that a car for his shipment will be wait- 
ing at the railway station so that his grain may be trans- 
ferred directly from his own wagons to the car. The 
farmer may, of course, take the grain to an elevator 
company and sell it outright, receiving the cash for it 
on the spot. 

So far as the price is concerned the farmer and the 
elevator company are on exactly equal terms for bar- 
gaining, because the price at any railway station is ex- 
actly the same as the market price at Fort WilHam 
(which is the point of shipment on the Great Lakes) 
less a constant, which includes freight to Fort William 
and all elevator charges. The market price at Fort 
William is based in turn upon the Chicago and Liver- 
pool prices. Advices upon the fluctuations in these mar- 
kets are practically equally available to the farmer and 
to the elevator company.^ 

68. Establishing grade and quality. — There is, how- 
ever, another element. The price being fixed independ- 
ently of the farmer and of the elevator company by the 
external market, the quality or grade remains to be de- 
termined, because upon this depends the price of the 

^ Exactly the same conditions obtain in the manipulation of cotton and grain 
in the United States. 



70 ECONOMICS 

particular lot upon the scale fixed from day to day at 
Fort William, and from moment to moment on the 
Corn Exchange at Liverpool and in the "Wheat pit" 
at Chicago. It seems that from the point of view of 
the farmer, the elevator company always grades his 
wheat too low, and from the point of view of the ele- 
vator company every farmer thinks that all of his wheat 
is No. 1 Hard. The estimation must be a rough and 
ready one. The question of quality could easily be de- 
termined on a scientific basis, but there is no time for 
tliis. Even the Government inspection of wheat is of 
a rough and ready character, and the standards are sub- 
ject to frequent change. The problem is a very diffi- 
cult one. Up to the present time no real solution has 
been found. Disputes between the farmers and the ele- 
vator companies having become frequent, a Grain 
Growers' Association has been formed for the purpose 
of dealing with the question co-operatively, and this 
association has had a considerable amount of success. 

69. From elevator to market. — If the farmer comes 
to terms with the elevator company respecting the 
grade, he receives a check upon a local bank for the 
amount due him — grade and market price being the only 
elements in the calculation — and the farmer's interest in 
the grain ceases. This is the normal course. If the local 
elevator is filled with grain, and it is impossible to get 
it conveyed to the central elevators at Fort William be- 
cause of the scarcity of cars, the system does not work 
so smoothly. The elevator company may refuse to take 
delivery of wheat offered by the farmers. This, how- 
ever, rarely happens. 

The grain having passed into the hands of the ele- 
vator company, it is placed in the elevator with other 
grains of the same area and the identity of each par- 



AGRICULTURE 71 

tfcular lot is at once lost. The elevator company makes 
up its carloads and sends them off as rapidly as possible 
to Fort William, m here the grain is transferred to huge 
elevators and then loaded on steamers which convey it 
across the Great Lakes to Buffalo on Lake Erie, to 
Montreal or to Depot Harbor. At Montreal the grain 
is loaded upon ocean steamers; from the lake ports it 
is transported by rail to Portland, Boston or Philadel- 
phia, or by rail or canal and river to A^ew York for 
shipment to Great Britain. The stream of grain begins 
about the beginning of SejDtember and continues until 
the first week in December. 

70. Financing ci'op movements. — The elevator com- 
panies in the West could not possibly conduct the busi- 
ness upon their own capital. They must borrow from 
the banks. This they do upon the security of each par- 
cel of grain as it is transferred to the railway company 
for transportation. In the aggregate the amount re- 
quired for the movement of the crop is so great that 
preparations have to be made for some time beforehand. 
Formerly the Canadian Banks provided a portion of the 
funds necessary for the movement of crops in the United 
States ; now the Canadian requirements are large enough 
to tax bank resources during the period from Septem- 
ber to December. 

The documents — grade certificate, bill of lading and 
the drafts — are forwarded together at the time the 
wheat is shipped, and the Canadian bank is credited 
in London with the amount which has been paid on its 
account as soon as the wheat arrives. 

This complex process which, so far as the producer is 
concerned, is the final process, is achieved only by the 
co-operation of a great number of voluntary agencies — • 
railways, steamships, banks and elevator companies — the 



72 ECONOMICS 

combined capital of these agencies being vastly in ex- 
cess of the agricultural capital employed in the produc- 
tion of the wheat. The services wliich this intricate 
organization renders are necessary under modern condi- 
tions in order to transfer rapidly commodities from one 
market to another. Without some such series of agen- 
cies the farmer would be unable to dispose of his sur- 
plus wheat, and the European consumer would have 
to pay a much higher price for wheat locally produced. 
Indeed, the large industrial town would be an impossi- 
bility without the co-operation of the long series of ac- 
tive agents which begins with the farmer and ends with 
the baker. 

71. Wheat market most highly organized. — The mar- 
ket for all farm produce is, however, by no means so 
effectively organized. The chief reason for the effec- 
tiveness in the organization of the wheat trade is the 
universality of the demand as well as the elasticity of it. 

The saturation point or the point where there is no 
further increase of demand, even though the price be 
reduced to a low point, is high in the case of wheat. 
Oats and rye, on the other hand, are not so universally 
demanded, and their saturation point is lower. Wheat, 
unlike vegetables, fruit and dairy produce, does not de- 
teriorate so long as it is kept dry. It may be kept for 
a long period of time. Organization on the same scale 
as that applied to wheat is therefore not applicable to 
any but a similar commodity. Attempts have been 
made to organize the fruit trade, especially in Canadian 
apples, but the difficulty of standardization and the re- 
luctance of the growers to submit to marketing regu- 
lations, together with the perishable nature of the fruit, 
have rendered the organization of the market for fresh 
fruit very difficult. Cold storage has facilitated the or- 



AGRICULTURE 7S 

ganizatlon of the market for fruit, milk, butter and some 
other perishable produce. 

72, Bleat production as an extractive industry. — The 
production of beef, bacon and mutton may be regarded 
as belonging to the category of the exploitative indus- 
tries under the head of agriculture. The existence of 
immense herds of native cattle (such as the buffalo in 
North America), living upon the natural grasses and 
migrating over the plains, suggested the utilization of 
the unsettled plain regions by means of domestic cattle. 
Great herds of these were thus branded and hberated on 
the plains of Texas, Montana and other states, and the 
same method was adopted in Southern Alberta. 

Everj^ spring the whole of the cattle of a region of 
perhaps from 26,000 to 40,000 square miles were 
"rounded up" — that is, they were collected together by 
mounted men and the calves were branded with the 
brand of the cows with which they were running, the 
"mavericks" or orphans being sold in order to defray 
the expenses of the "round up." In the autumn another 
"round up" was organized and the cattle which were 
intended for sale were collected, driven to the railway 
stations and entrained. The stock on the more impor- 
tant ranges was good, and although the first investment 
of capital was considerable, and though in severe win- 
ters many cattle were lost, the expenses were not rela- 
tively heavy and cattle ranching was in general a prof- 
itable enterprise. 

The land was sometimes leased for nominal rent (gen- 
erally one cent per acre or six dollars and forty cents 
per square mile) from the government or was purchased 
outright by the ranchmen — sometimes they leased a 
large area and purchased a smaller area in addition. 
The practice of ranching resulted in a great addition 



74 ECONOMICS 

to the production; and the consumption of beef was 
greatly stimulated, especially in the industrial centers 
of England. 

A certain amount of cattle ranching is still carried on ; 
but the j)ractice has disappeared from Southern Alberta, 
except in the footliills of the mountains. The ranges 
over which the cattle roamed at will a few years ago 
are now occupied, though scantily, by settlers. Settle- 
ment and ranching are mutually exclusive. The conse- 
quences of this change have been the diminution in the 
production of range cattle and a certain stimulus to the 
production of stall-fed cattle owing to the advance in 
the price of beef. 

In the United States and in Canada the trade in 
bacon has been organized by the pork packers, and the 
export trade has been organized in the same manner 
as the export trade in manufactured goods. The trade 
in mutton which has been highly organized in New 
Zealand has not been effectively organized in America. 
Certain regions are peculiarly fitted for sheep farming, 
but a great part of the plains is unsuitable, partly be- 
cause of the character of the grasses and partly because 
of the depredations of wolves. The production of mut- 
ton is thus not any more than sufficient for local con- 
sumption. 

The chief points of economic interest in connection 
with these and other similar exploitative industries are 
the extent to wliich it is possible for producers to re- 
spond to variations of demand, and the method of or- 
ganization by means of which the produce is brought 
to the most advantageous market. Some of these points 
are discussed more fully under the head of Exchange. 



CHAPTER VII 

MINING 

73. Gold mining. — The extraction of minerals forms 
in many regions a large part of the class of exploitative 
industries. The mining of each mineral and the or- 
ganization of its exploitation present somewhat differ- 
ent economic features. The extraction of the precious 
metals and of diamonds, for example, presents one series 
of economic problems and the extraction or iron and 
coal another series. 

Gold, for instance, is very widely but very unevenly 
distributed in nature. Where it does occur in a recov- 
erable state it offers very large returns; the search for 
it, therefore, induces large expenditures. One real mine 
in ten prospective mines may perhaps be regarded as 
not too low an estimate. The element of chance obvi- 
ously enters very specially into all mining for precious 
metals. Prospectors will toil for months without ob- 
taining any return whatever, and then they may sud- 
denly discover a rich vein. This circumstance tends to 
divert a large amount of capital into gold mining, much 
of which is unproductive. For that reason a gold 
"fever" is rarely of benefit to a country. Capital is di- 
verted from industries of a less attractive but more 
steadily remunerative character, and is expended upon 
mining which is fruitless more often than not. 

74. Two hinds of gold deposits. — Gold deposits maj^ 
be looked upon as consisting broadly of two kinds — 
one is the deposit of relatively low grade ore, the ore 

75 



76 ECONOMICS 

being very abundant and containing gold tbrougliout 
the whole body; the other is a deposit in which the ore 
is characterized by veins of occasional but exceeding 
richness. The deposits of the Rand in South Africa 
are of the former, those of Porcupine in Ontario are 
of the latter description. The first mentioned ore re- 
quires only economical treatment by mechanical or 
chemical means or both to yield a return more or less in 
excess of the cost of mining, and under skillful man- 
agement may be made to yield a handsome return. 
Such mining requires, however, large capital expendi- 
tures in plants for the treatment of the ore and a rela- 
tively large amount of labor. 

The large returns from the South African mines have 
been due to the discovery of means to treat the ore in 
such a w^ay as to recover nearly all the gold it contains, 
and to the availability of a practically unlimited supply 
of labor at a low price. The disturbance of economical 
relations caused by the South African war resulted for 
a time in great difficulty in procuring labor. The 
Kaffirs, who had been working in the mines for low 
wages, suddenly found themselves enriched by the much 
higher pay which they received for their services as 
muleteers and otherwise during the war. They were 
enabled by means of their savings to buy wives to work 
for them, and they were therefore able to anticipate a 
life of ease. 

Under these circumstances the mines were deserted, 
and they could only have been re-manned by Kaffirs 
by means of a system of forced labor, which public 
opinion in Great Britain would not have permitted. 
The mine owners then imported Chinese laborers, who 
were willing to work for the wages offered to them; 
but this system also had its drawbacks and objections. 



MINING 77 

The effects of the war have been passing away in con- 
sequence of the lapse of time, and the labor conditions 
previous to the war have been gradually resumed, with 
occasional interruptions. 

75. Gold iniimig in British Columbia. — In British 
Columbia the situation of mining is in some ways not 
greatly dissimilar. There, also, the bulk of the ore does 
not seem to contain any large quantity of gold ; but the 
quantity is sufficient to justify its recovery. The treat- 
ment of the ore requires the application of a consider- 
able amount of capital and the employment of a con- 
siderable amount of labor. But there is no large native 
population to draw upon. The total population of the 
province is very small compared with its immense area, 
and the price of labor is liigh because labor is scarce. 
The immigration of Chinese and Japanese is impeded 
as much as possible, and the consequences are relatively 
high miners' wages and an unattractive field for the in- 
vestment of capital. Thus, while in South Africa the 
Kaffirs have lent themselves to exploitation, and by that 
means the gold has been exploited, in British Columbia 
the gold has not been proportionately exploited, because 
there has been insufficient free hirable labor. Capital 
has thus been prevented from being invested in plants 
suitable for the British Columbia ores, and the produc- 
tion of gold has been less in consequence than it might 
otherwise have been. It would, however, be unsafe to 
infer that had the mines been fully and rapidly exploited 
by cheap labor other than merely temporary advantage 
to British Columbia would have resulted.^ 

76. Silver mining. — Silver is much more widely dis- 
tributed, and, as a rule, much more easily recovered from 

^ The economic importance of gold is considered in relation to the origins 
of money and the theory of the causes of the fluctuations of prices. See Part 
II, "Exchange." 



78 ECONOMICS 

the ores in which it is contained than gold. The quan- 
tity of silver available for use at a particular moment in 
relation to the quantity of gold similarly available has 
varied greatly in historical times. Silver has, however, 
become gradually much more abundant. The value of 
silver in terms of gold, that is, the number of ounces 
troy of silver which may be purchased by one ounce troy 
of gold in the early part of the fifteenth century was 
about 11 to 1; during nearly a hundred years, between 
the end of the eighteenth century and 1873, the value 
remained about 15 to 1; since then the value has fallen 
to about 35 to 1. 

77. Decline in value of silver. — This great change has 
been produced by several causes. The more important of 
these are the increase of production and the diminution 
of consumption of silver for currency purposes, and — es- 
pecially between 1870 and 1886 — the comparatively slen- 
der production of gold and the increasing use of that 
metal for currency purposes. Until the period of the 
Franco-Prussian War silver was the predominant cur- 
rency medium of Central Europe, and until the present 
time it is the predominant currency medium of ^-lexico, 
China and India. It also enters largely into the cur- 
rency of the United States in the form of silver certifi- 
cates. A large part of the metallic currency of the 
world is still in silver, and fresh supplies are constantly 
being demanded for this purpose, but the production of 
silver has grown in excess of this demand, and the de- 
mand for industrial purposes has been insufficient to 
prevent the price from falling. 

78. Attempt to sustain the jjrice of silver in U. S. — In 
order to attempt to avoid the demoralization of silver 
prices, the Bland- Allison Act of 1878 was passed in the 
United States. That act provided for the purchase of 



MINING 79 

between $2,000,000 and $4,000,000 worth of silver at the 
market price each month, and its coinage into silver dol- 
lars weighing 4121/^ grains. These silver dollars did not, 
however, as such, go into circulation. The silver circu- 
lation consisted of silver certificates — between 1878 and 
1886 of $10 and upwards, and between 1886 and 1890 
of $1 and upwards. The Bland-Allison Act was in oper- 
ation for twelve years, and during this period about 378 
million silver dollars were coined. In 1890 the Sherman 
Act increased the purchase of silver to 4,500,000 ounces 
per month. 

79. Effect of silver legislation. — The effect of this 
operation upon currency is obsei-ved in the discussion on 
monetary questions. Here w^e can only speak of its 
effect upon the supply of silver. The effect appeared 
to be to limit the production of silver to an amount 
somewhat larger than was sufBcient to meet the artificial 
statutory demand of the United States, as well as the 
demand from other countries for currency purposes, and 
the demand from all countries for the arts. 

The Sherman Act was in force for three years, about 
fifty million dollars a year being coined in the course 
of that period. By 1893 it became evident that it was 
beyond the power of the Government of the United 
States to sustain the price of silver by means of pur- 
chases, and the panic of 1893 gave the coup de grace to 
silver legislation. 

A natural check to the fall in silver came, however, 
with the increase in the production of gold. The discov- 
ery of rich mines and the invention of economies in the 
reduction of silver ores have together rendered the sil- 
ver market peculiarly susceptible to the influence of 
demand. An unexpected shipment of silver may sud- 
denly depress the price, provided the supply it offers is 



80 ECONOMICS 

in excess of the demand of the moment. British Colmn- 
bia produces a considerable amount of silver concen- 
trates recovered from Galena or silver lead ore. Cobalt 
produces, on the other hand, native silver as well as silver 
in other forms. The cobalt ores are treated in reduction 
works at Thorold, Ontario ; but the concentrates are sent 
to the United States to be refined. 

80. Mining camps tend to raise prices. — The silver 
mines at Cobalt have attracted miners from all over the 
world, as did the gold mines of British Columbia in 
1896. Towns have sprung- up throughout the mining 
region, and consumption in these towns has increased 
the demand for farm and garden produce from south- 
ern Ontario, and for canned meats and finiits from the 
United States as well as from the province. Since sup- 
plies have frequently to be taken to regions remote from 
railway or even wagon transportation — have, indeed, to 
be "packed" in on the backs of men — the cost of trans- 
portation forms so large a part of the total cost that 
only the best qualities of the various commodities con- 
sumed by miners and prospectors are customarily sent 
to mining regions. The opening up of a mining region 
thus alters the character of demand, and tends to raise 
the prices of superior qualities of the commodities con- 
sumed by mining camps. Nearly every year "rushes" 
take place to newly discovered mining areas and some- 
times the older camps are practically deserted. 

Occasionally unusual features develop in the relations 
of capital and labor. Miners who believe in a mine will 
sometimes take bare subsistence in kind from the owners, 
and will take the balance of their stipulated wages in the 
stock of the mine either at the market price or at a price 
fixed by agreement between them and the owners. 

81. Copper mining. — The existence of native copper 



MINING 81 

on the north and south shores of Lake Superior was 
known to the Indians in the seventeenth century, and 
attempts to recover the metal began during the latter 
part of the eighteenth. The principal copper regions 
are in the northern part of the State of Michigan and 
at Sudbury in Ontario. The Michigan mines have been 
enormously productive during recent years, the capital 
for their exploitation having been obtained through 
American credit largely from Europe. The labor has 
also been procured from Europe; large numbers of im- 
migrants of various nationalities have gone into the cop- 
per mines. At Sudbury the capital has been supplied 
chiefly by English firms in the copper trade. Expert 
miners, chemists and managers have been sent out from 
England, and the mines have been developed skillfully 
and profitably. 

82. Nickel mining. — At Sudbury, also, nickel is being 
mined in important quantities under conditions similar 
to those under which copper is being exploited in the 
same regions. A large proportion of the nickel which is 
used in association with steel in the manufacture of armor 
plates is produced at Sudbury. 

83. Iron mining. — Iron ore was shipped from Vir- 
ginia from the beginning of the seventeenth century, and 
in 1619 smelting works were erected near Richmond. 
These were, however, destroyed by the Indians in 1622. 
A smelting furnace was erected in 1643 at Lynn, Mass. 

At this period the manufacture of iron was still a 
small affair in Europe. Sweden was the principal source 
of supply until in the beginning of the eighteenth cen- 
tury Peter the Great established large works by means 
of forced labor in the Ural Mountains. In 1722, these 
works produced the bulk of the iron then being manu- 
factured, 
c— I— 6 



82 ECONOMICS 

The iron industry of Great Britain did not become 
important until after the middle of the eighteenth cen- 
tury. Colonial pig-iron was permitted to enter Great 
Britain free of duty in 1750, although the erection of 
rolling and other mills for the manufacture of iron bars 
and plates and of furnaces for the manufacture of steel 
was prohibited in the American colonies. 

84. Iron industry in U. S. — It was not until the dis- 
covery of anthracite coal in the beginning of the nine- 
teenth century that iron smelting on any large scale was 
possible in America. This event led to the discovery of 
new sources for the supply of ore and to the rapid de- 
velopment of the industry. Pittsburg became at this 
time the center of iron manufacture. The war of 1812- 
14 stimulated all manufactures in the United States 
because it shut off for the time the competition of Brit- 
ish manufacturers. 

Peace brought so great a "glut" of imports that many 
of the iron furnaces on the coast were "blown out." 
Pittsburg was saved by the mere fact of distance. Grad- 
ually the discovery of fresh sources of supply, both of 
coal and iron, and the application of capital and labor 
to their exploitation brought iron manufacture to a high 
point. After the Civil War, the requirements of the 
railways, which then came into existence, were too great 
for the American iron manufacturer at this stage of 
development, and great quantities of iron rails were 
imported from Great Britain. The results in that coun- 
try were great increases in the price of iron, in its pro- 
duction, in the price of coal, and in the rate of wages in 
the iron and coal industries. 

The construction of railways gave, however, an im- 
mense stimulus to iron and steel manufacture, although 
there were temporary checks due to the over-construe- 



MINING 83 

tion of railways which became manifest in 1873 and due 
to the panic of 1893. Since then the manufactm'e of 
iron and steel has developed to such prodigious propor- 
tions that, according to the report of the National Con- 
servation Commission of 1909, the high-grade iron ores 
of the Lake Superior region will be exhausted by 1939, 
and resort must then be had to inferior or less accessible 
ores. Meanwhile, owing to the richness of the ores and 
to their ready accessibility, American iron is probably 
being produced more cheaply than European iron in 
spite of the greater cost of labor. The operations of 
mining are not, however, being conducted so econom- 
ically in the United States as they are in Europe when 
the exploitation of the mineral areas is considered as a 
whole. 

85. More economical handling. — It seems that since 
the iron ore of the Lake Superior region has fallen into 
the hands of large companies — the United States Steel 
Corporation chiefly — the exploitation of the ore is being 
conducted with greater economy than was the case when 
it was in the hands of small companies. The Mesabi 
Range, for instance, is mined in an efficient manner. 
The whole of the drift overlying the bodies of ore has 
been stripped, so that the operation of extracting the ore 
is rather quarrying than mining, and the whole of the ore 
can be extracted by systematic work. It is true, how- 
ever, that the masses of low-grade ore are not touched. 
The richest ore is taken out first; later, as the price of 
iron advances in consequence of the exhaustion of the 
high-grade ore, the interior ore masses will be worked. 

86. Iron mining in Canada. — Iron mining in Canada 
began also at an early date ; but the difficulty of procur- 
ing labor and capital, the absence of skill on the part of 
some of the earher enterprisers, and the character of the 



84 ECONOMICS 

ore, delayed the development of the industry. The smelt- 
ing of bog-iron was, however, carried on successfully, al- 
though on a moderate scale, prior to the growth, within 
recent years, of the iron and steel industry at Sault Ste. 
Marie and at Sydney, Cape Breton. The establishment 
of these large enterprises has brought about a demand 
for iron ores. This demand has been satisfied until the 
present time, chiefly by Newfoundland and by the 
United States. 

87. Coal mining. — Coal is very widely distributed over 
the world. The most extensive known deposits, exist- 
ing at depths which enable them to be exploited in the 
present phase of exploitation (a phase limited partly by 
the cost of mining and partly by the state of technical 
knowledge) , are to be found in Europe, in Great Britain, 
France, Belgium, Germany and Russia; in Asia, in 
China proper and in Manchuria ; and in North America, 
in the United States and in Canada. The active exploi- 
tation of coal began about the middle of the eighteenth 
century; but it was not until the improvement of the 
steam engine by Watt in 1776 that a real impetus was 
given to its exploitation for industrial purposes. The 
application of steam power to marine propulsion, fol- 
lowed immediately by its application to land locomotion, 
led during the nineteenth century to enormous develop- 
ment of the coal fields. 

In the United States the chief coal fields are the East- 
ern, which extends over a great part of the States of New 
York, Pennsylvania, Ohio, West Virginia and Louis- 
iana; the middle coal field, which extends over nearly 
the whole of Illinois and a part of Indiana; and the 
Western field, which extends over a part of North Da- 
kota and a part of ]\Iontana. There are other smaller 
and less productive fields. In Canada, coal is mined in 



MINING 85 

Nova Scotia, in Manitoba (to a small extent), in Al- 
berta and in British Columbia. There is no true coal 
in Ontario. 

88. Coal mmes subject to law of diminishing returns. 
— The law of diminishing returns applies in a very spe- 
cial manner to coal mining. Every additional foot in a 
lateral cutting, and every additional foot in a vertical 
cutting involves not only an additional amount of labor 
and capital, but involves an additional expenditure of 
these items per foot. Thus, assuming that the first hun- 
dred feet of a mine cost to sink and equip an amount 
equal to $50 per foot, the second hundred feet might be 
estimated to cost $75 per foot, the third hundred feet 
$125 per foot, and so on until the increased rate per 
foot becomes prohibitive of further extension of the mine 
either laterally or vertically. 

89. Guarding against law of diminishing returns. — • 
The operation of this law of increasing cost — other- 
wise the law of diminishing returns — will depend in the 
earlier stages upon the methods adopted in mining. If, 
for example, the mine is a horizontal one driven into the 
side of a mountain (like the mine at Frank in Southern 
Alberta, and numerous other mines in mountainous re- 
gions ) , the subsequent operation of the mine will be facil- 
itated by careful clearing up of debris from the start 
of the cutting; and still more by "stopping" up, where 
necessary, the roof of the mine. If this is not done the 
fall of the roof may, on occasion, block the mine and it 
may be necessary to recut through the fallen deb?is, which 
may not be coal, and which will, therefore, involve un- 
returnable expense in removing. 

The same is true of vertical mining. The galleries at 
various levels must be cleared out and all coal removed 
in order to yield the best result. Mining in Belgium 



86 ECONOMICS 

and in Great Britain, for instance, is customarily carried 
on in this manner. The coal is wholly exhausted from 
one section of a mine before serious attempts are made 
to exploit any other section. The mine is indeed looked 
at as a whole, which has to be exploited thoroughly, part 
by part. When the mine has been worked until, owing 
to the lateral extension of its workings, new shafts be- 
come necessary for more economical management, new 
shafts are sunk. When the seams "dip" to such an ex- 
tent that the cost of mining becomes prohibitive, the deep 
workings, after being exhausted so far as is possible in 
an economic sense, are abandoned; but they remain in 
such a condition that, except for accidental falls in the 
roofs of the galleries owing to decay of the pit props or 
other causes, the mine might be reopened to resimie the 
deeper workings. This would be done if the price of coal 
should advance owing to scarcity or if technical improve- 
ments in mining should render this proceeding advan- 
tageous, irrespective of the momentary conditions of the 
market. 

90. Waste in American coal mining. — According to 
the reports of the Anthracite Coal Commission and of 
the National Conservation Commission, coal mining in 
the United States is not carried on in the manner de- 
scribed above. The reports made public facts about the 
exploitation of coal which were long previously well 
known to those who were interested in the sub j ect. These 
facts led to the conclusion that in respect to anthracite 
coal, about one and a half tons were wasted and that in 
respect to bituminous coal, about one-half ton was wasted 
for each ton respectively placed upon the market. This 
waste, it appears, was occasioned partly by the adoption 
of the practice of leaving columns of coal in the mine to 
support the roof instead of propping the roof with tim- 



MINING 87 

bers and exhausting the coal; partly by working the 
richer and thicker seams in the first instance irrespective 
of their levels, thus leading to the caving in of mines, 
owing to the superincumbent coal in the thinner seams 
not having been worked out ; and partly by the produc- 
tion of an undue amount of "slack" or "culm," which is 
too fine in grain to be marketable as it comes from the 
mine. Tliis "slack" accumulates to such an extent that 
it has to be burned in order that it may not encumber 
land which might be put to other uses. 

It v/ould appear that American mining practice is 
crude, that the crudeness is due to disregard of the 
economy of material and to an extreme regard for the 
economy of labor, and that these conditions are due to 
the necessity of aiming at immediate returns. 

91. Labor in the eocploitative industries, — Labor in 
the exploitative or extractive industries is performed to a 
large extent both in the United States and Canada by 
comparatively recent immigrants. In agriculture in 
both countries, the laborer usually looks forward to the 
possession of a liomxcstead in Canada or of a rented farm 
in the United States. There is no organization of agri- 
cultural labor in either country; but the wages of agri- 
cultural laborers are relatively high because of the ease 
with which a laborer, even without capital, may estab- 
lish himself independently, because of the seasonal char- 
acter of the occupation and because of the competition 
of mining and industrial employment. The attractions 
of the mining camps, for example, in 1896 drew not only 
agricultural laborers, but settled farmers from their 
farms. There were many abandoned farms on the west- 
ern Canadian prairie in that year. 

Mining both for the precious metals and for minerals 
is in America manned by a racial diversified population. 



88 ECONOMICS 

Experienced gold miners who have worked in the mines 
in Siberia, in the Rocky Momitains and elsewhere are to 
be found in the mining camps of Ontario, British Colum- 
bia and the Yukon. The railway construction camps, 
which are analogous to the mining camps because they 
represent a partially organized type of settlement, con- 
tain also nomadic groups — Lithuanians, Finlanders, 
Russians proper, Bulgarians, Swedes, Italians, Gali- 
cians and Ruthenians. 

In Europe the laborers employed in the extractive in- 
dustries are, in general, hereditarily so employed — agri- 
cultural laborers are the sons of agricultural laborers, 
as miners are the sons of miners. In Scotland, however, 
of late years the coal mines have been increasingly 
manned by Lithuanians and hj laborers of other north- 
ern European races. 



CHAPTER VIII 

MANUFACTURING STAGE OF PRODUCTION 

92. Characteristics of complex production. — The 
characteristics of manufacture by the method of simple 
production have already been described; the character- 
istics of manufacture in complex production are chiefly 
these: the organization of industrial enterprises involv- 
ing the employment sometimes of large numbers of per- 
sons and the utilization of large amounts of capital. 
These enterprises, as it were, conduct the commodity 
through the numerous phases which come between ex- 
ploitation of the raw material and the final delivery of 
the consumable product to the ultimate purchaser or con- 
sumer. 

It is the function of the manufacturer to perform 
this social service and he is enabled to do it by the co- 
operation of the persons who render the other equally 
necessary services. For example, the organizing em- 
ployer or manufacturer cannot within the limit of his own 
proper function sustain the burden of the charges upon 
his business without the aid of the capitalist whose capi- 
tal renders possible the process of waiting until the prod- 
uct is so far manufactured that it can be exchanged on 
some terms and also renders it possible for the organ- 
izing employer to retain his product until he can ex- 
change it at the most advantageous price. 

93. Specialization in manufacturing. — One of the 
characteristics of modern industry is the specialization of 
function in the manufacturing industry. This specializa- 

89 



90 ECONOMICS 

tion leads to the formation of large enterprises for the 
manufacture of commodities which are not final, but 
which are destined to enter as raw material into the 
manufacture of more or less final commodities. Thus the 
steel tubes which enter into the stiaicture of a bicycle 
are manufactured by one concern, the india-rubber tires 
by another, and so on, the bicycle being assembled in 
some cases in a workshop where no single part of it is or 
can be made. The same is tnie of pianos and of many 
other commodities. 

This distribution of manufacturing function has been 
accompanied by concentration in other directions, and 
this concentration has been due chiefly to two influences ; 
first, the desire to diminish competition by the amalga- 
mation of two or more competitive enterprises, and, sec- 
ond, the desire to reduce the cost of production by the 
diminution of the general expenses of management. The 
expectations implied in these influences cannot be said 
to have been fully realized in practice. Increase in mag- 
nitude of an industrial unit demands increase of skill in 
management, and this increase of skill is not always 
forthcoming. Increase in magnitude of a factory com- 
promises the economy of interior management and often 
requires the complete reconstruction of the factory not 
because its parts are worn out, but because their relations 
to one another have been altered by the additions to cer- 
tain parts. The gross gain must thus be subjected to de- 
duction in respect to the increase in costs of certain ele- 
ments. 

94. Localization of industries. — The industrial cities 
of Europe have, as a rule, grown upon ancient sites se- 
lected on grounds of military or commercial strategy 
under conditions that have long passed. The importance 
of some of these cities (like Venice, Nuremberg and Re- 



MANUFACTURING STAGE OF PRODUCTION 91 

gensburg, for example) has become of small account 
when compared with their ancient prestige; other cities 
(like Hamburg, Brussels, Amsterdam, Paris, London 
and Edinburgh) have retained their earlier fame and 
have added to it the influence acquired in modern times. 
The localization of industry is by no means a new tend- 
ency. In the later middle age, Bruges and Ghent were 
celebrated for their woolen cloths, as in later times Ver- 
viers became celebrated for its fine woolen yarns, Paisley 
for thread, Manchester for cotton, the west of England 
and the south of Scotland for tweeds, Sheffield and Sol- 
ingen for cutlery and Edinburgh for beer and for print- 
ing. In the United States, the worsted and cotton indus- 
tries, the shoemaking industry and others have been 
strongly concentrated in the New England towns ; De- 
troit has developed a great automobile industry; Pitts- 
burg became early the seat of the iron and steel manu- 
facture. In Canada, Montreal, Toronto, Kingston, 
Hamilton and Sherbrooke have become important cen- 
ters of miscellaneous mechanical industries ; Sherbrooke 
has specialized in mining machinery, Kingston in loco- 
motives, Peterborough in electrical machinery, Montreal 
in bridge building and in sugar refining, Toronto and 
Brantford in agricultural machinery. A process analo- 
gous to the division of labor has been in progress. 

95. Factors in locating an industry. — The choice of 
locality for a particular industry depends upon a variety 
of considerations, among which the more important are 
the facilities for transporting the raw material and the 
finished product, the facilities for obtaining a good wa- 
ter supply (indispensable in the case of paper mills, for 
instance) , the facilities for obtaining power and the facil- 
ities for obtaining labor. The textile and shoemaking in- 
dustries are more advantageously established in the Prov- 



92 ECONOMICS 

ince of Quebec than they can be in Ontario, because of 
the greater amplitude of the supply of female labor. Of 
slightly less importance are the cost of land, the rate of 
local taxation, the possibility of obtaining exemption 
from taxation or of obtaining a bonus from a municipal- 
ity, and the like. 

96. Efect of male and female labor upon location. — 
While the relative ease with which labor can be obtained 
in already existing centers of population constitutes a 
strong reason why manufactures should be drawn to 
these centers, sometimes there has been a disposition on 
the part of manufacturers to establish works in small but 
readily accessible places. Examples of this are the 
growth of a rubber industry, a piano industry and a drug 
industry in small towns in Ontario. This practice tends 
to prevent industrial activity from being confined to one 
or two great centers and contributes to the prosperity of 
the agricultural region in the neighborhood of these 
subordinate industrial centers. 

Unless, however, industries which are complementary 
to one another in respect to male and female labor are 
established together, difficulty must be experienced in 
obtaining labor. Towns where men or women respec- 
tively are exclusively employed are industrial anomalies. 
For this reason places where textile factories, in v/hich 
women are predominantly employed, are established, 
generally attract engineering or other similar works 
where men are exclusively or predominantly employed. 

The municipal governments of the Canadian cities and 
towns have endeavored to attract industries by means 
of bonuses and exemption from taxation; and in the 
United States attempts have been made by means of dif- 
ferential railway rates to compensate for deficient natu- 
ral advantages, and thus to equalize economic opportu- 



MANUFACTURING STAGE OF PRODUCTION 93 

nities. The competitive struggle of industrial and com- 
mercial centers has sometimes been very acute. 

97. Division of labor and over-production. — ^Within 
the factory, division of labor, which has been practiced 
from the remotest times, has been carried to a high de- 
gree, and automatic machinery has reduced human labor 
to a minimmn. Division and specialization of labor have 
been important factors both in the amalgamation and 
in the localization of industry and in the economies which 
have resulted. Yet by means of specialization, and espe- 
cially by the use of automatic machinery, over-produc- 
tion of particular commodities, and therefore economic 
loss, may very readily take place. 

Some ridicule has been cast upon the idea that over- 
production is possible. Over-production is, nevertheless, 
a fact. If a machine is suddenly introduced which dou- 
bles or trebles the output of a particular commodity, 
there is no law of nature which provides a demand for 
the increased quantity. Even at a price which is ruin- 
ously below the diminished expense of production, it is 
clear that the whole of the increased quantity might not 
be demanded. 

The author was being shown through a large factory 
in which an article of staple consumption was manufac- 
tured. He was shown with much pride a battery of six 
automatic machines for the purpose of making certain 
parts of the staple commodity — only one of these was in 
operation, and it was evident from the appearance of 
the others that they had not been in operation for some 
time — probably, not at all. In this case the powers of 
production were greatly in excess of the requirements 
of the industry. It would probably have been more eco- 
nomical to purchase the parts made by the automatic 
machinery from some concern which undertook to sup- 



94 ECONOMICS 

ply the whole trade than to instal in individual factories 
at great expense a battery of rarely used machines. 

In every nation every year a certain portion of the 
national income — public and private incomes being taken 
into account — as well as the major portion of the funds 
borrowed within the nation or abroad, are devoted to 
the production of commodities whose production oc- 
cupies a long time and whose utilities are yielded very 
gradually over a long period. Of this nature are rail- 
ways, canals, docks, waterworks, hydro-electrical plants 
and durable machinery of all kinds, steamships, public 
and private buildings, roads, streets, and the like. 

Out of the national income there is expended a further 
portion upon production which yields more or less imme- 
diately realizable utilities. Of this nature is the expendi- 
ture upon seed grain and the like; upon clothing and 
upon the numerous things which satisfy our daily wants. 
It is clear that it is a matter of the utmost social impor- 
tance that a certain proportion should exist in respect 
to these two forms of expenditure. If a farmer were to 
occupy the whole of his time and his resources in building 
a house for himself while his fields were lying idle, he 
would soon involve himself in difficulties. Some portion 
of his time and resources might be advantageously so 
expended, but not the whole. 

98. Over-production of articles of future usefulness. 
— Highly durable commodities yield their utilities over 
a long period — the fact that they do so constitutes their 
durability. They are, therefore, under normal condi- 
tions highly valued. Under conditions, however, in 
which there is immediate need of commodities for imme- 
diate consumption, the offer of remote utilities is beside 
the question. To offer a starving man a steamship or a 
railway would be at least irrelevant. If a banker were 



MANUFACTURING STAGE OF PRODUCTION 95 

to lend or invest more than a certain proportion of his 
total assets upon land or buildings, he might find him- 
self unable to meet his engagements because of the ina- 
bility to realize upon his securities. If the government 
of a country or if a large number of individuals do what 
no one individual may do with impunity in this connec- 
tion — viz., spend a disproportionate amount of the re- 
sources of the country at a given moment in highly 
permanent utilities — no matter how advisable the ex- 
penditure may have been on many grounds of public 
or private policy — a crisis must eventually occur. The 
phenomenon is really one of over-production. 

99. Over-production of railways. — There may not be 
too many miles of railways from the point of view of the 
traveler or the trader, but there may be too many from 
the point of view of the critical accountant. He realizes 
that the fixed charges on his line have become so heavy 
in consequence of its rapid expansion, that no mat- 
ter how economically the line is managed and no matter 
how successful it may eventually become, there must be 
a period during which the company must default in the 
payment of the interest upon its bonds. Dui'ing that 
period it may be forced into liquidation and the property 
of the shareholders may be sacrificed. 

Over-production of railways is not an unusual phe- 
nomenon. It occurred in Great Britain between 1840 
and 1848; it occurred in the United States between the 
close of the Civil War and 18T3; it occurred in New 
Zealand in 1875-76; it occurred in Italy between 1875 
and 1880. Such over-production of railways has always 
had the same result, provided the over-production has 
been pushed to an extreme — the result of producing a 
financial crisis or of contributing to a crisis of which 
there were as well other causes. 



96 ECONOMICS 

100. Over- production of crops. — There may even be 
over-production of wheat or of any other single crop. 
The price of wheat falls to a low point under such con- 
ditions, and large numbers of people who are consum- 
ers of wheat benefit from the fall in price as well as 
those who derive advantage from the reaction which a 
fall in the price of wheat produces, but the producers 
suffer. They may have a bountiful crop, but its ex- 
change value may be so depreciated that they are im- 
poverished. This phenomenon has occurred with some 
frequency in Eastern Europe. The difficulty of avoid- 
ing over-production of certain foodstuffs owing to the 
comparative inflexibility of agriculture has already been 
noticed. 



CHAPTER IX 

GETTING GOODS TO MARKET 

101. Marketing a phase of production. — In getting 
goods to the market after their production has been com- 
pleted, more is involved than the mere transportation of 
the goods. A market must be found to which the goods 
may be sent ; in other words, goods must be introduced to 
the notice of intending buj^ers or brought within the vis- 
ible supply. In the large agricultural markets of Con- 
tinental Europe, market officials and policemen bustle 
about ordering the farmers into special places in which 
long lines of hay wagons, other long lines of carts with 
miscellaneous produce, other long lines of horses, cattle, 
etc., are arranged, so that buyers may pass along the 
lines and readily compare one with another of the same 
group. To the public market everyone who observes the 
market regulations has equal access, and in it he has a 
right to equal opportunity with everyone else to offer 
what he has for sale. In such markets it can hardly be 
said that there are any strategic points in the long lines 
of wagons and booths. 

When the goods are brought into view, and a buyer 
appears, bargaining begins. The Greek philosophers 
regarded bargaining as an art standing apart from the 
other arts, separate from the art of agi'iculture, which 
they considered as the only productive art (i. e., the art 
which contributed the whole of the resources of the peo- 
ple) and separate also from manufacture and the fine 
arts. The Greeks did not regard the art of bargaining 
C— I— 7 97 



98 ECONOMICS 

as a productive art, but neither did they so consider 
manufacture and the fine arts.^ 

102. Circulation of capital an important factor. — It 
may be observed that the quantity of the net product 
which is available for the community as a whole is in- 
creased by rapid, and diminished by retarded, circulation 
of capital. If the velocity of the circulation of capital 
is increased, the output is greater, as it would be greater 
in the case of the product of a piece of machinery if the 
speed of the machinery were increased. If, therefore, a 
producer has slender powers of bringing his wares to 
market — if he is a poor bargainer, in short — he is slow 
in exchanging his wares, and he is therefore slow in pro- 
ducing them. During the same period of time he pro- 
duces less than a more active bargainer, and he has fewer 
resources for further production than a more successful 
bargainer. The "national dividend" is in consequence 
poorer than it would be if both bargainers were equally 
active and equally successful. 

The idea that the success or failure of a bargain is 
unimportant to the community appears to be based upon 
the notion that what is a good bargain for the seller must 
be a bad bargain for the buyer, but this is by no means 
the case. Even the most astute seller is not always able 
to secure "the maximum advantage" for himself. The 
maxim, "a fair exchange is no robbery," is no doubt 
sound, but what is a fair exchange is not always easily 
determined. 

103. Injurious bargaining. — Perhaps the most impor- 
tant case of bargaining is the bargaining about wages. 
If the view be held that what the man bargains about 
is not merely his labor, but his life, such bargaining is 

* The view that bargaining is unproductive is held, although the point is not 
elaborated, by Professor Pigon in his interesting and suggestive book "Wealth 
and Welfare" (p. 169). 



GETTING GOODS TO MARKET 99 

by far the most important case. Here it may be admitted 
at once that the exploitation of labor — that is, the prac- 
tice of securing from labor the maximum yield for the 
lowest wage compatible with the continuance of produc- 
tion by means of a succession of gradually exhausted 
workers — cannot be advantageous to a community either 
economically or otherwise. The practice may build up 
some vast fortunes, but so, also, may many other prac- 
tices based upon the folly or the wickedness of mankind. 
Other cases of exploitative bargaining are to be found 
in the sale of adulterated goods and of fraudulently in- 
flated stocks. Exploitative bargaining may be very in- 
jurious to the "national dividend," as, on the other hand, 
exchange, properly so called- — that is, the exchange of 
equivalents— is obviously productive. 

Apart from fraud, however, mere incompetence in 
manufacture of goods or in organization of enterprise 
may produce similar results. In the gold-mining 
"boom" of 1896-97 in British Columbia, and in the sub- 
sequent cobalt silver "boom," large sums of money were 
employed by farmers and small tradesmen in the pur- 
chase of stocks in mines, the greater number of which 
eventually turned out to be worthless, although there 
were not many cases even of alleged fraud. Such trans- 
actions involve the diversion of funds which might have 
been devoted (although not necessarily) to agricultural 
or other production. 

104, Advertising an element in production. — An im- 
portant element in "getting a market" in modern com- 
merce is the practice of advertising. Early methods, such 
as advertising by means of the Town Crier or by means 
of crying or chanting in the streets in more or less mu- 
sical tones, or by means of notices fixed on the doors of 
churches, where every person who was likely to be inter- 



100 ECONOMICS 

ested was likely to see them, have given place to the 
electric sign, the billboard, and the volumes of advertise- 
ments with a few pages of text which appear monthly 
under the covers of the popular magazines. The prac- 
tice, in general, may be regarded as part of the price 
which society has to pay for its desire for novelty and 
diversity in consumption. Much of it, for this reason, 
results in a diminution of the national resources — ^that is, 
in waste — partly because the advertising is excessive and 
partly because it is advertising of useless or injurious 
things. 

If the skillful getting of a useful commodity to market, 
by advertising or otherwise, results in so great an exten- 
sion of the market and in the production of the commod- 
ity on so large a scale that the producer's price is dimin- 
ished, and if the market price is brought down by 
competition, it is clear that there is an advantage to the 
consumer. It is true that the "national dividend" may 
be held to be neither increased nor diminished because the 
capital and labor which were exercised upon the produc- 
tion in question might have been otherwise equally pro- 
dnctively employed; but on this ground it would be pos- 
sible to deny any increase in the "national dividend" from 
any source whatever. The increased production due to 
the increased demand makes possible the utilization of 
machinery which increases the rate of production per 
man or per machine. 

The laws of increasing and diminishing returns apply 
with very special force to competitive advertising. There 
is a point which can, as a rule, be determined only by 
experience, where no additional advertising can increase 
sales, where such additional advertising would be waste- 
ful not merely from the national point of view, but also 
from the point of view of the individual enterprise. 



GETTING GOODS TO MARKET 101 

105. Wholesale and retail trade. — Sometimes the 
manufacturer sells his product directly to the consumer. 
This practice is very general in certain trades. It is 
usual in the printing trades, and it is the rule in the tailor- 
ing trade, except in ready-made clothing. The practice 
is, however, rare in the case of the manufacturer of the 
partially finished goods which are used by the trades 
mentioned. 

Paper is in general sold by the mill at which it is 
made to a wholesale dealer who keeps a certain quantity 
of different varieties and from different mills in stock. 
The printer finds it advantageous to buy his paper, not 
from the mills, because he would require to have connec- 
tions with half a dozen mills, but from a wholesale paper 
dealer who can supply what he wants on the instant 
from stock. The quantity he wants may be too insig- 
nificant for the mill to supply or the mill in which it is 
made may be in Japan or in England or in Germany. 
The business of the wholesale dealer is to keep a suffi- 
cient stock to meet the demands of the trade. The func- 
tion of the wholesale dealer has become indeed more and 
more important as production has become more miscel- 
laneous. The exclusion of the middleman is by no means 
an easy task when the middleman discharges a useful 
function. 

The retail trader also discharges a function which has 
enabled him to contribute importantly to the organiza- 
tion of economic life in modern communities. The com- 
plaint of the farmer on the remote prairie is not that there 
are too many stores, but that there are not enough or 
perhaps not any within reach. The system of retail 
trade has been altered, not by the elimination of the 
function either of the wholesale or the retail trader, but 
by the growth of the latter into the keeper of a depart- 



102 ECONOMICS 

ment store. While production has become more and 
more highly specialized and wholesale business has to 
some extent followed this specialization, retail trade has 
become universalized. The consumer desires to econo- 
mize time, and therefore wishes to do all his shopping in 
one shop. 

106. Will the middleman he eliminated? — The depart- 
ment store may not be cheaper, but it is more convenient, 
and where time is valuable convenience is worth pay- 
ing for. There does not seem, therefore, to be any wide 
movement in the direction of eliminating the middleman. 
It has been thought that by the use of the parcel post 
and by the facilitation of the remittance of small sums of 
money, the producer and the consumer might be 
brought more closely together. Such measures are use- 
ful, but they cannot be said to have had any wide effect 
in altering the established currents of trade. For a time 
it was thought that the department store would absorb 
all retail trade ; but in this case also it would appear that 
there is a law of diminishing return. 

As the standard of comfort rises, people become more 
fastidious, and the specialist retail dealer who thoroughly 
understands his business acts, as it were, as inspector in 
the interest of his customers, and thus justifies his ex- 
istence. When, however, as in the case of some of the 
cities in Poland, cited in another connection, the num- 
ber of retail dealers becomes excessive, competition 
reduces their earnings to the margin of subsistence; 
or, as in the case of isolated retail dealers in places remote 
from urban centers, the monopoly which they exercise 
may cause the whole community to pay excessive prices 
for what they supply. 

The development of distributive co-operation in the 
north of England and in the south of Scotland has in 



GETTING GOODS TO MARKET 103 

some districts altered not merely the character of retail 
trade, but has to some extent altered the structure of 
society in the villages and small towns by imposing a 
check upon the grovvi;h and even sometimes upon the 
continuance of the class of the smaller merchantry. The 
iiniversalization of distributive co-operation in a country 
would involve the elimination of this class, and would 
therefore drive it abroad or compel its absorption into 
the wage-earning class. 

107. Seasonal trades. — While climatic conditions de- 
termine the periods during which certain industries can 
be carried on, means of equalizing such industries are fre- 
quently being devised. Cold storage, for example, has 
rendered it possible to retain certain products for an in- 
definite time after production, and some industries which 
were, prior to its adoption, necessarily strictly seasonal, 
have been enabled by means of it to be carried on more 
or less continuously. 

The preparation in factories of building materials has 
even diminished the loss of time in open-air building 
operations through unfavorable weather. 

Yet in all northern countries the seasons have an im- 
portant influence upon many industries. The work of 
bricklayers and stonemasons is arrested in all northern 
regions for weeks or months, according to the season. 
Continuity of production from year to year in seasonal 
industries w^ould be impossible unless the product were 
sufficient to enable the Vv^aiting time to be endured with- 
out loss.^ 

^ See discussion of Unemployment, Part V; Chapter VI. 



PART II: EXCHANGE 

CHAPTEK I 

BARTER AND MONEY 

108. Barter economy. — When goods are produced 
they are utiHzed by the producer, are given away or are 
exchanged for other goods or for money. Although the 
use of money dates back to very early ages, all races 
practiced exchange by barter in early times; and from 
time to time, even after money economy had been fully 
established, they have reverted to it when need arose. 
Payment in kind, of taxes and of rents, has survived to 
our own day. 

In the strict sense, barter is the direct exchange of 
consumable goods for other consumable goods; in the 
strict sense, exchange occurs when consumable goods or 
services are rendered for money or when money is given 
for consumable goods or for services. In the strict 
sense, also, whatever may be the material which has by 
common consent over a small or over a wide area ac- 
quired the position of money, the particular object, 
whatever it may be, is by this mere fact removed from 
the category of consumable goods. 

This fact appears to have been the essential characteris- 
tic of barbaric money. Among nomads barter is common 
because the range of their wants is limited and because 
anyone of the few commodities which they custo- 
marily acquire by barter can almost always be utilized 

104 



BARTER AND MONEY 105 

by them. The earlier explorations of Siberia and Cen- 
tral Asia, in which the explorers had to come in contact 
with numerous nomadic tribes, were accomplished in the 
following manner: When the explorers reached a point 
where there was the last considerable market in which 
Russian money was exchangeable they purchased a flock 
of sheep. This flock they drove before them and, as they 
advanced, consumed them or exchanged them for other 
food as they found occasion. When the flock was re- 
duced to one-half its original numbers, it was time to 
return. 

Where habitual relations are established and where 
life has little complexity, barter is more or less easily 
effected; but when the parties to the transaction are 
strangers to one another, and are unfamiliar with the 
wants of one another, there may arise an absence of coin- 
cidence of wants and then barter becomes impossible. 
This contingency often arises in the case of scientific ex- 
peditions whose members are unfamiliar with trade con- 
ditions; and who are therefore encountered by diflicul- 
ties in traveling, where traders proceed with ease. 

109. Escaviyles of immitive barter, — So in Central 
Africa, before Arabian and European traders had intro- 
duced coins into the country, and in the absence of the 
circulation of native money ( of which an account is given 
below), trade was conducted by means of the barter 
of brass rods and wire, beads, brandy, cotton cloth and 
a few other commodities for palm oil, gold dust, ivory 
and gum. In the earlier days of the Hudson Bay Com- 
pany, their trade in the Hudson Bay region was largely 
conducted by means of barter of copper kettles, for ex- 
ample, for furs. At a later period the company devel- 
oped a system of token currency. In Massachusetts, dur- 
ing the early part of the century, barter was prevalent 



106 ECONOMICS 

in the rural districts, as it still is in some of the remoter 
Scottish villages, where calves and pigs are customarily 
bartered for groceries. A barter economy can be prac- 
ticed extensively only by people who live a simple life, 
whose surplus of production above their own require- 
ments is slender and whose range of wants is slender 
also. But barter economy does not necessarily involve 
stability in relative values. When fish is plentiful among 
a community of fishermen, a quantity of fish which may 
be offered in exchange for a harpoon or for a skin-boat 
will be large, irrespective of custom ; when fish are scarce 
and the community is famishing for want of it, weapons 
and boats will alike be sacrificed to procure fish or other 
food. Thus fluctuations in relative values antedate the 
use of money. 

110. The origins of money. — Like the origins of 
standards of weights and measures the origins of money 
are lost in the remotest antiquity. Nearly every useful 
thing known to early man in some place or at some time 
has been used as money. 

The essential characteristic of the commodity which 
is regarded as money is the universality of tlie demand 
for it within the reach of its recognition as money. It is 
thus universally acceptable on certain terms. The pre- 
cise dividing line between barter exchange and money 
exchange is sometimes difficult to determine. It seems to 
be near the point at which particular examples of the 
commodity, whatever it may be, cease to be utilized for 
the purpose for which they were previously customarily 
utilized, and begin to be utilized exclusively for purposes 
of exchange ; or when the quantities of other commodities 
for which the commodity in question is exchangeable 
come to be more or less definitely fixed by custom; and 
when the worth of other commodities comes to be ex- 



BARTER AND MONEY ' 107 

pressed in terms of the weight, length or niunber of pieces 
of the commodity used as money. Thus, for example, 
among the people of the Congo, weapons of various 
shapes and made of various materials — iron, copper, sil- 
ver, ivory and wood — were used as "current money of 
the merchant." Some of these weapons might have been 
employed for the purposes for which weapons are usu- 
ally made ; but very many of them could not be used for 
any such purposes. Their design indicates the origin of 
their form; but the pieces themselves could only be util- 
ized for purposes of exchange, as indeed they were 
throughout the Congo region. 

So, also, in China, the ancient Tartar knife came in 
remote antiquity to be used as money. Its form was 
gradually altered. It lost its point. It lost its sharp- 
ness until it became a disk with a hole in it and with a 
short flat projection. Eventually the projection disap- 
peared, and there remained only a flat disk still with 
either a round or a square hole. 

The so-called hoe-money of China is regarded as hav- 
ing a similar history. Originally hoes appear to have 
been utilized not merely for hoeing, but also for bar- 
ter; then a bronze hoe smaller than the iron hoe, but of 
substantially the same shape, came to be used as money, 
the size of the hoe gradually diminished until it became 
only about an inch and a half long and about an inch 
in width. Hoe-money was extensively circulated in 
China for many centuries. 

In the Malay Peninsula where tin occurs in the river 
sands, this metal was from early times used as money 
in square blocks of varying size and thickness, but al- 
ways perfectly free from impurities. In course of time 
the blocks were reduced in weight by making a square 
hollow in the center, and then by reducing the reverse 



108 ECONOMICS 

side in such a way that the square hollow on one side 
showed as a square projection on the other. Within 
comparatively recent times this square tin currency was 
extensively circulated in the Straits Settlements. 

Fish-hook money, canoe money and many other forms 
have been current in the islands of the Pacific. Wam- 
pum made from the inner whorl of the husyon perver- 
sum, a shell brought to the north from the Gulf of 
Mexico, was extensively used by the Indians of North 
America until it was replaced by European coins. 
Masses of silver of various sizes and shapes have been 
used in many regions for currency purposes. The 
greevna, a weight of silver varying in different places 
and at different times, was the current money of the 
Dnieper Valley from the eighth till the eleventh cen- 
turies, or perhaps both earlier and later, and the sycee 
or shoe silver is at present used as the reserve of the 
Hongkong and Shanghai Bank and of other banks in 
China. 

111. Gold mid silver as money. — The position which 
for many centuries gold and silver have held as widely 
accepted money materials is due partly to the wide recog- 
nition of their beauty, to their durability (gold oxidizes 
very slowly, and although silver oxidizes more rapidly, 
its luster can readily be recovered ) , to their ready divisi^ 
bility, to their easily attainable uniformity, to the readi- 
ness with which they may be distinguished from other 
metals, to the difficulty of imitating them, and to their 
density, which enables them to receive and to retain 
minute designs similar to those which for ages had been 
engraved upon precious stones which possessed the same 
property of high density. Although gold and silver are 
neither of them unique in respect to any one of these 
characters (some of them, indeed, they possess in com- 



BARTER AND MONEY 109 

mon with many other substances ) , they combine these 
characters in a way that no other substances do. 

The nearest metal to gold and silver in wide appre- 
ciation as money is bronze ; but bronze is readily oxidiz- 
able, and it is not found in nature; it requires to be 
manufactured. Zinc, one of the metals of which bronze 
is composed, is not always found in the neighborhood 
of copper, the other principal constituent. The remain- 
ing constituents are variable, and their presence in the 
bronze is not susceptible of determination excepting by 
analysis. Although fine bronze is a very beautiful metal, 
all bronze is not fine, and this variability renders it less 
desirable as money material than it would be could its 
uniformity be secured. Nevertheless, bronze has been 
used for centuries even for large payments in spite of its 
inferior character and of the inferior and variable value 
which it consequently possesses in relation to gold and 
silver. In the interior of China the writer has met Chi- 
nese merchants whose servants were carrying large quan- 
tities of bronze "cash" on strings for the purpose of mak- 
ing purchases. The variability of the value of the cash 
in relation to the Mexican dollar, which is current in the 
Treaty Ports, is a usual cause of loss to the peasantry in 
the interior, who are frequently called upon to pay ex- 
orbitant amounts in cash in payment of taxes, the value 
of the cash being frequently arbitrarily depreciated by 
the authorities for the purpose of the tax payments. 

Gold and silver thus acquired in early ages a univer- 
sality of acceptance which they have retained. One or 
other or both form either the currency or the basis of the 
currency of all commercial nations. Although the rec- 
ognition of currency media is wider than political divi- 
sions, otherwise international exchange in the strict sense 
would be impossible, the opportunity of deriving some 



110 ECONOMICS 

advantage by controlling the currency seems to have 
suggested itself to rulers at a very early period. This 
opportunity seems to have presented itself through the 
payment of tribute which was frequently required to be 
delivered in specific coins. 

The history of coinage cannot be detailed here, but 
the fact may be noticed that coins cut from flat pieces 
of metal with the stamp of rulers made their appearance 
long before the beginning of the Christian era. The 
Greeks applied their unrivaled skill in the plastic arts to 
coin design, and in this they were followed by the 
Romans, whose gold coins were in wide circulation 
throughout the Roman Empire. 

112. 31 07162/ a standard of value. — From the above de- 
scription it appears that gradually, by a social-psycho- 
logical process supplemented by the edicts of rulers who 
required that tribute should be paid in certain specified 
currency, such currency or "current money" came to be 
regarded as a standard by which the worth or value of 
commodities in general might be expressed. Since all 
commodities could be estimated in this way, the value 
of any one of them in relation to the others could be ex- 
pressed in terms of money, which thus came to be the 
common denominator of value. Since the quantities of 
commodities which were demanded could not always bear 
the same relation to the quantities offered in supply, 
and since the quantity of money material which was sup- 
plied for currency purposes could not always meet the de- 
mand for it for these purposes, the terms of exchange 
were variable as the terms of barter would have been 
variable had money not been employed for purposes of 
exchange. 

That fluctuations of value antedate money economy 
has already been noticed. It is at least a tenable hypoth- 



BARTER AND MONEY ill 

esis that the use of money, together with the use of 
credit, which follows, has had a steadying influence upon 
relative values, although proof of this hypothesis would 
he difficult to establish in detail. It is, however, clear 
that the alteration or even the abolition of the measure- 
ing rod, which is a fair description of money, would not 
remove inequalities, or, excepting verbal denominations, 
affect the measure of things. 

A survey of this kind derived from archaeology and 
from history does not, however, explain what are the 
grounds for the various estimates of the relative values 
of commodities which are expressed in money, and to 
a discussion of this question we shall now proceed. 



CHAPTER II 

UTILITY AND VALUE 

113. Value hosed on utility or exchangeability. — It is 
important to notice first that the process of valuing is a 
mental process. It may be affected by external influ- 
ences, but it takes place in the mind. It is important to 
notice, second, that the conception of value always in- 
volves a relation between the person valuing and the ob- 
ject valued. The relation may assume one or the other 
of two forms. We may think of the object as being valu- 
able to us because we can put it to a useful purpose or 
because we believe we can exchange it for something 
which will be equally or more useful to us or for its 
equivalent in money. In the first case, we consider the 
value in use of the object, and in the second case, the 
value in exchange of it. 

Since the value in exchange of all commodities 
depends eventually upon their usefulness to some one, 
although not necessarily to the temporary possessor, 
it may be held that the two motives for valuation are 
really identical from a social point of view. It is, how- 
ever, convenient to regard the two motives separately 
and to consider that goods are estimated in respect to 
their value in use or their utility to us, as well as in re- 
spect to their exchangeability . Indeed, we habitually 
contrast the advantages which we derive from the pos- 
session of an object with the advantages which we may 
hope to derive from the possession of other objects for 
which we might exchange it or which we might purchase 

112 



UTILITY AND VALUE 113 

with the money we might obtain for it. Before pur- 
chasing a thing we frequently balance in our minds the 
relative usefulness of the thing which is offered to us as 
compared with something else the advantages of which 
have been carried in our mind. 

In the case of an important purchase by almost any- 
one, and in the case even of unimportant purchases by 
some people, the process of calculation is prolonged and 
complicated. The process ma}^ however, be reduced to 
the following elements. We estimate the utility of 
things in respect to the intensity of the pleasure they 
may be expected to afford us or the amount of incon- 
venience which they will enable us to avoid. We esti- 
mate the utility of things also in respect to the imme- 
diacy or otherwise of this anticipated pleasure. ^lost 
people are willing to pay more for things which they 
can have for enjoyment at once than for things for 
which they may have to wait a long period. We also 
estimate things in respect to the duration of their utility 
or to the number of utilities which we expect to realize 
from them. 

114. Intense desire and urgent demand. — Intense de- 
sire arising from hunger or passion leads to exceedingly 
urgent demand, and, therefore, where the supply is 
Hmited, to high price. Two celebrated and wealthy col- 
lectors of rare books gave separately to two different 
agents instructions to buy without limit as to price 
a particular volume of unique character which was to 
be exposed for sale by public auction. The bids of these 
two competitors rose to high figures until one of the 
agents began to fear the possible reproaches of his prin- 
cipal and stopped bidding; the book was knocked down 
by the auctioneer to the other agent at a price which 
was many times the highest price previously paid for 
C— I— 8 



114 ECONOMICS 

the same book, and was undoubtedly greater than could 
have been obtained for the book in the absence of two 
competitors wealthy enough to gratify their passion for 
collecting even if the cost should be excessive. 

If inconvenience or pain is present or imminent, and 
if we are offered the means of alleviation, our desire 
for alleviation being thus urgent, we may be willing to 
surrender a large part of our total resources rather than 
dispense with the object which will relieve us of the 
inconvenience or pain. In the dry areas of Africa, 
Asia, America and Australia, where the region is cov- 
ered with hot sand, where there is little rain, and where 
the subterranean waters are too deep to be readily ac- 
cessible, the possession of water is a matter of life and 
death. Under the pressure of extreme thirst, a trav- 
eler may give up all he has for sufficient water to slake 
his thirst. 

Irrespective of the urgency or otherwise of the desire, 
where the supply is abundant and access to the supply 
possible with minimum exertion, there is no exchange 
value. While boating on a lake or river of pure fresh 
water, thirst may readily be satisfied by a minimum of 
exertion. 

115. Various degrees of desire. — Between extremely 
urgent demand and complete indifference because of 
surrounding abundance or because of lack of desire, 
there are numerous gradations. At one point on a scale 
of this kind, a thing might offer to us a degree of use- 
fulness, practically infinite, and at another point it 
might offer itself in vain to a satiated palate. 

Usefulness is an affair of the moment or of successive 
moments, and is closely related to quantity considered 
in reference to our desires and requirements. 

Some things may be useful to us continuously or 



UTILITY AND VALUE 115 

periodically, others only occasionally but indispensably. 
A pair of spectacles may be of practically continuous 
use to us, a razor periodically and a revolver occasionally 
but indispensably. In each case, on occasion, the util- 
ity may be enormously in excess of average utility to us 
or of the utility of the particular instruments consid- 
ered as one of many or considered as belonging to us 
at normal times. 

116. Diminishing usefulness. — Utility is closely re- 
lated to quantity. The utility of one glass of water 
may be set down as infinite to a person who is perish- 
ing of thirst. The utility of a second glass of water 
immediately after the first, as nearly, but not quite so 
great, the utility of the third glass not nearly so great, 
and so on; the utility of each successive glass dimin- 
ishing until thirst is completely slaked. Tliis is known 
as the law of diminishing utility. 

If the supply is forced beyond the point of satiation, 
it may become embarrassing or dangerous or even fatal. 
The same is true of food, especially after a long fast, 
and indeed the same is true of all things. A folk-story 
of the Irish peasantry tells of a peasant who desired gold 
very earnestly. Presently a piece of gold dropped 
through a hole in the roof of his cabin, then another 
piece dropped, and so on until in spite of his protests 
the gold became a shower which eventually filled his 
cabin and overwhelmed him. 

117. Disutility. — Things which are of high utility to 
us in quantity appropriate to our desires or require- 
ments come to be of disutility if they are either beneath 
these requirements or in excess of them. In other 
words, utility cannot be determined or assumed apart 
from conditions of desire and of quantity, time and 
place. Thus, for the purpose of walking, only one boot 



116 ECONOMICS 

is practically useless. For swimming, one boot would 
be less of an encumbrance than two ; although even one 
in such a case would be a discommodity. 

118. Quality of commodity and character of need. — 
While utility is a characteristic of things attributed to 
them by the mind which looks upon them in relation to 
itself, to the physical and chemical properties of bodies 
is due the circumstance that they can satisfy our de- 
sires and can by this means be useful to us. If we 
desire a life-belt, we choose one made of cork for the 
reason that the specific gravity of cork is less than that 
of water; if we desire a furnace which must sustain a 
high temperature we choose fire-brick which has been 
subjected to a test and has demonstrated its heat re- 
sisting properties. For certain chemical operations, we 
use crucibles of porcelain, platinum, graphite, accord- 
ing to the properties of the substances which we desire 
to reduce. 

The properties of bodies are constant under continu- 
ously like conditions, but because of the variation of 
our needs they are not continuously useful to us. We 
warm ourselves at a hot stove; we become warm and 
may soon become overheated. We must leave the stove. 
We desire coolness. The first few minutes in an ice- 
house are agreeable; but our desire does not go to the 
freezing point. 

Some commodities yield their utilities in one dose as 
it were ; others yield their utilities in numerous and per- 
haps in various doses. An orange which may have been 
cultivated with infinite pains in California, Florida or 
in Spain yields its utility in a few moments ; and its skin 
becomes an encumbrance — a disutility. A chair or a 
table may be utilized for hundreds of years for the pur- 
pose for which it was designed and made, and then the 



UTILITY AND VALUE 117 

wood of which it was constructed might be utilized for 
numerous other purposes successively until finally it 
might be burned as a discommodity. 

Some commodities may be utilized for one or other 
of several purposes indifferently. A piece of pig-iron 
may be used as ballast for a ship, as counterpoise for 
a cantilever or as raw material for making steel. A 
steel ingot may be rolled into armor plate or into rails, 
plates or bars. The plates may be used for ship con- 
struction or for buildings; the bars may be made into 
tools or drawn into wire. From the same ingot there 
may come a railway rail, a pair of scissors and a sur- 
geon's knife. 

119. Value dejjendent upon place or condition. — 
While the value which we attribute to an object depends 
upon its utility to us or rather upon the sum of its utili- 
ties (the utilities of the commodities for which it is ex- 
changeable being included), it does not follow either 
that we must be continually making inventories of our 
possessions or that we must invariably pay for things 
in proportion as we consume their utilities. 

For example, we may consume air and water without 
paying, provided the supply is abundant and has not 
been appropriated by anybody. If, however, the air or 
water has been transported by public or private agency, 
we may be asked to pay even more than the cost of the 
transportation and we may be willing to do so because 
of the convenience of the supply. If, for example, we 
desired either air or water at a pressure of more than 
one atmosphere it might be advantageous for us to pay 
for it rather than to install machinery for the purpose 
of obtaining the pressure on our own account. Simi- 
larly it may be advantageous to us to install a prime 
mover in the form of a steam engine and to generate 



118 ECONOMICS 

electrical power for our own use instead of purchasing 
a supply from a public or private source. Even if we 
possessed control of water power it might or might not 
be more advantageous to utilize that power or to pur- 
chase electricity elsewhere. 

While air and water may be obtained freely, we must 
take them both in situ, that is, in the place in wliich na- 
ture has put them, and we must be content with the 
quality which nature has provided. Transportation of 
water is costly as also are both ventilation and change 
of air. 

120. Exchange value. — In the second sense in which 
the word value is customarilj^ used by economists, we 
value a thing because we believe that we can, if we wish, 
exchange it for something else or for money. There 
are many cases of, so to say, mixed value or value in- 
volving mixed motives. Thus we may possess a picture 
to which we attach a high value, first, because of its util- 
ity as a source of aesthetic stimulus, and second, because 
of its salability for a high price. 

To the merchant, the motive which induces the es- 
timate of value in purchasing and in holding a com- 
modity is, as a rule, quite simple. He is disposed to 
pay a certain price for it because he believes he can 
sell it at a higher price. In some instances prices are 
normally greater at relatively remote periods; in other 
instances they are smaller. Thus perishable goods like 
milk must be sold at once; some other goods gain by 
being kept. Wine matures in the cellar, and is some- 
times kept there for years, the price eventually obtained 
being in general much higher than the price of the im- 
mature wine. 

Utility is an individual criterion ; exchange value is a 
social criterion, because although the owner of an ex- 



UTILITY AND VALUE 119 

changeable commodity forms a subjective or personal 
estimate of the value of it, this estimate is based upon 
his knowledge of the estimate which other persons place 
upon it or upon his anticipation of the estimates they 
are likely to place upon it. 

121. Effective demand, — Estimates in the case of 
those persons who are final purchasers for consumption 
are based upon their personal needs taken in relation to 
their personal resources. There are many things which 
most men desire more than their resources enable them 
to obtain. The quantity of goods, however, which they 
desire and for which they can pay or for which they 
can obtain credit, constitutes their effective demand; 
and the total of this effective demand at a particular 
moment constitutes what is technically known as de- 
mand. 

In the case of those persons who buy goods to sell in 
the same form, and of those who buy them in order to 
use as the raw material of other goods, the desire to 
purchase depends upon their estimate of the probable 
requirements of their customers, whether these are final 
or intermediate consumers. The success of a manufac- 
turing, of a wholesale or of a retail business depends 
very largely upon the accuracy of such estimates. A 
mistaken forecast of the probable requirements during 
the spring season, for example, may embarrass a dry 
goods manufacturing firm because the goods have to be 
made before the season begins. If his forecast turns 
out to be too optimistic he finds on his hands a quan- 
tity of goods w^hich have either to be carried over to the 
following season or to be sold for what they will bring. 

122. Supply. — Supply thus depends, not wholly, but 
largely upon demand. If an increase in demand for 
dry goods among the farming population is anticipated 



120 ECONOMICS 

in consequence of the abundance of the harvest, the local 
stores will increase their stocks, the distant wholesalers 
from whom they customarily order their goods will 
place large orders with the manufacturers, and the man- 
ufacturers will work overtime or will install additional 
machinery, or even additional buildings, in order to meet 
the demand. Their power to do these things will, how- 
ever, depend upon their ability to increase the product 
of their factories with their existing means of produc- 
tion or to procure additional means of production by 
purchase from their own resources or on credit. 

The power of a manufacturer to utilize his existing 
or increased means of production will also depend upon 
the contracts he is able to make with his workmen. 
Since every manufacturer in the same branch of indus- 
try may be supposed to be doing the same thing under 
the same conditions, it may or may not be possible for 
any of them to increase the prices of their goods, although 
the mere increase in the product will give them an in- 
creased total profit provided the competition is not so 
keen as to result in diminished prices.^ Supply may be 
restricted even though the demand increases and the 
prices offered by those who desire the goods increase 
also, because the supply of the raw material may be 
restricted. 

123. The law of substitution. — What is known as the 
law of substitution is to the effect that when the price 
of a commodity advances to a certain point, another 
commodity may be substituted for it, provided the price 
of the second commodity is low enough to render its 
use more economical than that of the first conunodity. 
Thus, for some of the purposes for which silk is used, 

^ In the early stages of increase of demand, prices tend to rise and to continue 
to rise, until the supply overtakes the demand. 



UTILITY AND VALUE 121 

fine linen is nearly if not quite equally well adapted. 
If the price of silk rises, fine linen will be used for some 
of the purposes for which silk is customarily used. Sim- 
ilarly for some of the purposes for which linen is used, 
cotton will serve if not as well, nearly as well, and if 
the price of linen rises cotton will be used. If the prices 
of cotton advances, jute may be used for some of the 
uses of cotton. 

There are no doubt some substances for which no 
substitute exists for any or many of its uses. Substi- 
tutes for mercury are employed for some of its uses; 
but there are many laboratory experiments for which, 
in the present state of knowledge, mercury is indis- 
pensable. The same is true of platinum. 

Substitutes for some of the uses of india-rubber have 
been found, but no other substance possesses all of the 
properties of rubber and for some of those uses there is 
at present no subsitute. The enormously increased use 
of india-rubber for the purpose of making the tires of 
automobiles led to a demand for the raw material so 
greatly in excess of the supply that the price of rubber 
advanced rapidly. New sources of supply were sought 
and found, but the price remained high because the rub- 
ber plantations which are altogether in tropical coun- 
tries subject to cyclonic storms, are occasionally de- 
stroyed, and because the organization of tropical labor 
is very difficult. Thus, although the supply has been 
largely increased in response to the demand, there is no 
excess. 



CHAPTER III 

MARKETS 

124. Origin of local markets. — The relation be- 
tween demand and supply is discovered in the market. 
This expression is customarily used in two senses — one 
derived from the other. The first sense is special and the 
second general. 

Historically, a market is a meeting of persons for 
purposes of trade. Such markets were held at some 
place which was convenient for a concourse of people 
to assemble. Among nomadic people, markets are held 
on some neutral ground, more or less equally accessible 
to the tribes which attend it or send their representa- 
tives. Markets were thus frequently held at the con- 
fluence of tw^o rivers or at some strategic point on a 
river bank which might readily be fortified in case of 
attacks by hostile tribes. When especially suitable 
places were found, they were sometimes occupied in 
successive years at certain periods, and eventually some 
of these places becam.e permanently settled. The asso- 
ciation of markets with graveyards, and later with 
churches, is very frequent in Eastern Europe from the 
earliest times. 

125. The market at Nijni Novgorod. — The most im- 
portant survival of an early, although perhaps not of a 
very early, market on a particular site, is the market 
of Nijni Novgorod, at the confluence of the rivers 
Volga and Oka in Russia. This great market which is 
attended by traders from Central and Northern Asia 

122 



MARKETS 123 

and by traders from Europe and America is held 
annually in August. The permanent city which is quite 
small is situated on the high right bank of the Volga 
and on the right bank of the Oka. The city where the 
market is held is on the right bank of the Volga and 
on the left bank of the Oka. It is built of permanent 
houses, which are, however, occupied only during the 
period of the market. 

Although nearly every commodity finds a place there, 
iron, cottons, furs, tea and ikors (images which are to 
be seen in every Russian house, shop and office) are 
the most conspicuous commodities offered for sale. The 
fur trade of the world has been largely concentrated 
there. Fur coats which may be seen on Broadway, New 
York, have probably been purchased in the long street 
of the fur-sellers at Nijni Novgorod. 

126. Protecting market routes. — Permanent settle- 
ment in or near a market place and the more or less 
continuous resort of people there, even though the 
market might be held only periodically, necessitated the 
protection of the routes which led to and from the mar- 
ket. If these routes were exposed to hostile attack, 
the traders who customarily found their way to the mar- 
ket might fear to traverse the route or might be cut 
off if they attempted to do so. 

127. Some well-known market places. — -As communi- 
cations came to be more effectively organized and as the 
trading cities succeeded in offering improved facilities 
for trade, special markets came to be localized and cer- 
tain localities became places of resort for merchants. 
Thus the slave markets of Bagdad and of Constanti- 
nople were of importance in early ages, as the Fur Fair 
and the Book Fair of Leipzig are of importance now. 
The market for hiring farm laborers, known as the Fal- 



124 ECONOMICS 

kirk Tryst, and the market in Glasgow for hiring domes- 
tic servants, known as the Buchts, are examples of sur- 
vivals of ancient periodical markets in Scotland. Ex- 
amples of continuous markets are to be found in the 
Bazaars of Eastern cities and in the markets of the Bel- 
gian coast towns, and an example of a weekly market 
is to be found in the Sunday morning market for old 
clothes held in the square in front of the Hotel de Ville 
at Brussels, 

The commercial law of every country and much of 
the municipal law have been developed from the regu- 
lations of the market. The tolls charged for the use of 
the market were almost the beginning of municipal tax- 
ation. 

128. Operation in a typical local market, — In mod- 
ern times the small local market still plays a large role 
in urban and semi-urban life both in Europe and in 
America. The reader is recommended to attend a 
local market and to observe the transactions closely. By 
doing so he will have brought vividly before him on a 
small scale precisely the same problems in value which 
present themselves in the world-wide markets for the 
great staples. 

The proceedings of a typical market in a small Ger- 
man town may be briefly described. In the early morn- 
ing the farmers' carts begin to come into the market 
place. Some of them have come from a great distance 
and have started probably at two or three o'clock in 
the morning. The carts bring hay, grain, vegetables 
and fruit according to the season, and always poultry, 
eggs and butter. They generally bring also some prod- 
ucts of the domestic industry of the farmer's family — 
lace and the like. 

Sometimes the farmer transacts his business himself. 



MARKETS 125 

Frequently his wife or daughter acts as saleswoman. 
Customers arrive early and look about. Habit plays a 
large part in the German provinces, and customary 
prices are still very prevalent ; but even customary prices 
have their customary variations. Different prices are 
expected at different hours in the market, and strangers 
are usually called upon to pay more than friends. 

Prices which had been paid at the height of the mar- 
ket on the previous day are asked at the beginning of 
the market. Few transactions take place. More carts 
come in and more customers arrive. It soon appears 
either that there is a good supply of vegetables, or that 
the supply for the day is not going to do any more, or 
even perhaps may do less than will satisfy the demand 
at the price of the previous day. Intending purchasers 
become less keen if they find that the supply is large, 
and more keen if they find that in relation to their es- 
timate of the demand it is relatively small. 

By eight o'clock in the morning the most fastidious 
and the largest buyers have probably after discussion and 
much higgling settled upon the prices and made their 
purchases. Then those farmers who have sold out their 
produce may leave at once; those who have not done so 
endeavor to get the prices which have been fixed in pre- 
vious transactions. The poorer customers wait until 
the end of the market to pick up at low prices the re- 
mainder of the vegetables and other produce, for as a 
rule the farmers will sell at a low price rather than 
carry the produce back to their farms. By ten o'clock 
the market is practically empty save perhaps for some 
booths which are erected by local people for the sale 
of miscellaneous goods of town manufacture to the 
farmers' wives. 

The range of fluctuation in a restricted market of this 



126 ECONOMICS 

kind is not usually great ; the variations result from the 
relation of supply and demand with due consideration 
to differences in quality — for the village folk are shrewd 
buyers — and from slight preference to favored regular 
customers and to large buyers. 

What goes on in the small local market, with its well- 
informed and shrewd buyers and sellers, is very similar 
to the proceedings in larger markets, in spite of the in- 
significance of the suj^ply and the demand in the former 
case; yet in the latter the calculation of probabilities 
upon which bids are made and entertained are much 
more complicated because much wider influences must 
be taken into account. 

In the Corn Exchange at Liverpool there is a daily 
market for wheat as there is also in the wheat pit at 
the Board of Trade in Chicago. In the Royal Ex- 
change at Glasgow there is a daily market for pig-iron 
known as the Iron Ring. There are numerous other 
examples of the localization of the market for staple 
products. 

129. Market in the general sense. — It has been ob- 
served that the cardinal characteristic of a market is 
that it is a concourse of people assembled for the pur- 
pose of engaging in trade. Various historical examples 
of such concourses have been given above. There is, 
however, another sense in which the word market is used 
by economists. This sense has been derived from the 
historical market. Actual assembling of traders in a 
concourse is no longer necessary to constitute a mar- 
ket in this new sense, although such assemblies take 
place daily. The ocean telegraph cable has made "the 
world one city," and has given the world one market. 

The word "market" has thus come to be generalized. 
It now means the invisible concourse all over the world 



MARKETS 127 

or in the important centers where commerce is con- 
ducted on a large scale, of people who are engaged in 
trading in particular commodities at a particular mo- 
ment. Thus the market for wheat is, as it were, attended 
by wheat buyers and sellers throughout the world — in 
Great Britain, France, Germany and other great con- 
suming countries, as well as in Russia, Roumania, 
Egypt, India, Argentina, Canada and the United 
States, the principal producing countries. 

Whatever influences the demand on the one hand and 
the supply on the other, in respect to wheat in all of 
these countries, influences the wheat market, which is 
indeed the generalized expression for the total of wheat 
demand and supply, present and prospective, through- 
out that part of the world wMch is within the sphere 
of international exchange. 

In a strict sense the market means the combined state 
of demand and supply in a particular commodity at a 
given moment. Transactions are always taking place 
in the great staples — supply is always being diminished 
by the absorption of goods in consumption, and is 
alwaj^s being increased by production. So, also, de- 
mand is satisfied by supplies and revived by recurring 
wants. The market for goods is like a reservoir 
which is being drawn from continuously, and which is 
being continuously replenished. 

130. How to approach study of ''the marhet." — A 
concrete study of market practices has been suggested, 
but without some guidance such a study is very diflicult 
because for most people the practice of the market must 
be looked at from an unaccustomed angle. 

In scientific studies a common plan is to formulate, 
provisionally, certain assumptions and to build upon 
these assumptions. If the reasoning is sound the conclu- 



128 ECONOMICS 

sions will be sound for all cases in which the ascertained 
facts correspond with the assumptions. If the ascer- 
tained facts do not correspond with them, and if the di- 
vergence between them can be ascertained, the neces- 
sary corrections may be made upon the assumptions and 
therefore also upon the conclusions. 

Thus, for example, the compass is adjusted to indi- 
cate the North. Those who are skilled in such matters 
know that it does not anywhere do so precisely, and that 
it is necessary to make a correction for the local mag- 
netic variation. The compass is, however, extremely 
useful because, given a knowledge of the variation, the 
exact position can easily be ascertained by means of it. 

In economic reasoning it is assumed that everyone 
not only knows where his economic interest lies, but that 
everyone is engaged in the constant pursuit of his own 
interest. This assumption may not be well founded, 
but if we know the amount of self-regardlessness in an 
individual case, a very hard matter to ascertain, we can 
then find out what variation from the normal course of 
action to allow for. Proceeding upon the assumption 
that the pursuit of self-interest is the dominant motive, 
we may ask what are the factors which determine the 
relative values of commodities as expressed in market 
prices. 

131. Supply and demand illustrated. — Clearly, we 
have to deal with two sets of people in any market — 
with those who desire to buy and with those who desire 
to sell. Among the former set there are some who are 
urgently desirous of buying. The commodity which 
they want may be quite necessary to them, and their re- 
sources being ample they are prepared to pay any price 
which is demanded. In the same market there are also 
among the latter set some who are equally urgent sellers 



MARKETS 129 

— they are prepared to sell for any price which may be 
offered. In each set there may be found persons who 
are indifferent, and between the extremes in each set 
there will be found many who occupy intermediate po- 
sitions. It is clear also that in a market where there is 
a predominance of the demand side, that is to say, where 
there are more goods of a particular character de- 
manded than the visible supply can provide, the most 
urgent buyers will exert a strong influence toward rais- 
ing the price. The price under such circumstances will 
tend to approximate toward that price which can be 
paid by the most urgent buyers. These buyers are 
sometimes known as marginal buyers, and the process 
just described is the operation of the law of marginal 
utility. 

On the other hand, in a market where the supply is 
in excess of the demand, the price will tend to approxi- 
mate to the price which the most urgent sellers will 
accept. In other words, we have an example of the op- 
eration of the law of marginal disutility in contrast to 
the law of marginal utility. 

In the case of the buyers the urgency will depend 
upon the desire to possess the commodity and to utilize 
it; and in the- case of the sellers the urgency will de- 
pend upon the desire to dispose of a surplus utility of 
one kind in order to acquire a utility of some other kind 
for the purpose of satisfying an immediate want. Thus 
a farmer having a surplus of hay, and having not the 
wherewithal to provide food for his family, must sell the 
hay in order to provide food, while another farmer hav- 
ing food for his family, but having no fodder for his 
animals, must buy hay to feed them. 

132. How prices are established. — The market price 
at a particular moment wiU tend to be fixed at the 
c— I— 9 



130 ECONOMICS 

point on a scale of prices at which the most urgent (or 
marginal) seller meets the most indifferent (or mar- 
ginal) buyer or, conversely, where the most urgent 
buyer meets the most indifferent seller, according to the 
relations of supply and demand in the market. 

But both demand and supply are elastic. If there is 
an inadequate supply to meet an urgent demand, there 
will be a tendency for further supplies to be forthcom- 
ing, and if there is an inadequate demand to respond to 
urgent desire to sell, further demand will tend also to 
be forthcoming. The general tendency of the market 
will be to draw out demand and supply alike in such 
a way as to produce an equilibrium. Where this process 
cannot take place, because supply cannot be obtained (as 
in the case of india-rubber previously mentioned), the 
phenomenon of rising prices will appear; or where de- 
mand does not respond (as in the case of over-produc- 
tion) , the phenomenon of falling prices will appear. 

133. External influences upon market. — Behind all 
subjective estimates of value there are the external con- 
ditions which are regarded in relation to the respective 
individual desires. The characteristics of these external 
conditions are very numerous. 

With the universal! zation of the market through the 
improvement of means of communicating the state of 
the market at different places almost instantaneously, 
certain market centers exert an important influence upon 
the general market under certain conditions. Owing to 
the difference of time between the two great commer- 
cial continents— Europe and America — and owing to 
the fact that in the most important staples vv^hich form 
the bulk of international trade — grain and cotton — 
Europe represents demand and America represents sup- 
ply, under all conditions in which demand is more in- 



MARKETS 131 

fluential than supply, the European markets are more 
influential in determining the price than the American. 
On the other hand, when it happens, as it occasionally 
has happened, that supply is deficient, the dominant in- 
fluence is on the Western side of the Atlantic. 

The difference of time is important because European 
business is almost closing for the day before business 
in the United States begins. The course of trading in 
]\Iincing Lane in London, and in the Corn Exchange 
at Liverpool, thus influences inevitably the course of 
trading in the Chicago Wheat Pit. 



CHAPTEK IV 

PRICES 

134. A "fair exchange. — The medieval idea of a 
"just price" did not stand alone; it was one of a group 
of ideas. Throughout the middle ages and in modern 
times in certain parts of the world (notably in Asia) 
custom exercised an immense force and the customary 
price became the fair one. It was not always the same 
price, although it was customary. The "fair price" to 
a stranger was not a "fair price" to a friend; and a "fair 
price" in the morning was not necessarily a "fair price" 
w^hen the market was about to close. Even where the 
"fair price" was a pervasive idea, bargaining was not 
unknown. 

The notion that from the social point of view it does 
not matter whether a bargain is advantageous or not to 
one or other of the parties to it cannot be accepted with- 
out qualification. So far as the bargain in the strict 
sense is concerned, it cannot matter because the bargain 
is not of itself a productive operation. The bargain 
concerns itself with the value of a product, but does not 
of itself either increase or diminish production. Yet the 
result of a bargain or a series of bargains may be an 
increase or a diminution of production. 

If, for example, a craftsman excellently skilled in 
his craft is unable to make a living from the sale of his 
wares because he is unable to make such bargains in the 
sale of them as will enable him to realize their full value, 
and if in consequence of this circumstance he abandons 

132 



PRICES 133 

the making of the wares in question, the "social divi- 
dend" may thereby be diminished. 

So, also, if in a bargain about wages, a workman ob- 
tains for work in his proper craft less than a living 
wage, he may decide to abandon the craft in the prac- 
tice of which he is skilled and to devote himself to the 
practice of some other craft in which he is less skilled; 
and the social dividend may suffer loss. 

Or, in a larger case, if a group of wage earners are 
so remorselessly exploited by their employers that they 
receive wages of a less amount than will suffice to main- 
tain them at their normal level of efficiency, even though 
they render services to their employer of much more 
value than their wages represent, the "social dividend" 
will suffer from their inferior efficiency. 

Thus, in wage bargains especially and in some other 
cases of bargain making the "fairness" of the bargain 
is not a matter of social indifference. Where, however, 
both parties to a bargain are equally productive, and 
where their consumption is of a like character, it is mat- 
ter of indifference in a social, although not in a private 
sense, whether one or the other secures an advantage in 
a bargain. 

The case is really the same as where one of two com- 
pletely idle and dissolute gamblers wins from the other 
a bet. In either case, the proceeds of the bet will be 
expended in dissolute living, and in neither case will the 
fact of the bet being lost or won affect production in 
any sense. The transaction is thus a matter of social 
indifference. 

Where, however, a person who, under normal circum- 
stances, expends his resources productively, loses a bet 
or makes a bad bargain in a transaction with a non- 
producer, the national dividend must suffer, as it might 



134 ECONOMICS 

gain if the same person won a bet or made a good bar- 
gain under the same conditions. 

135. Customary prices. — While it is true that cus- 
tomary prices are very widely spread, and that the fam- 
ily and the caste exercise a powerful influence in the 
determination of wages and prices alike (especially in 
India, although not exclusively there), it is also true 
that very considerable variations in relative values occur 
even under conditions where customary prices are prev- 
alent. Such variations are exhibited, for example, in 
the fluctuations of the value in Chinese "cash" of the 
Mexican dollar. These fluctuations are exceedingly wide 
and they seriously affect the economic condition of a 
community because, though eventually all prices follow 
them, they do not do so simultaneously. The fluctua- 
tions in the prices of land, for instance, usually lag be- 
hind those in the prices of other commodities. 

Relative values indeed are much more variable in 
primitive communities than in those upon a higher level 
of culture. The practice of bargaining is more continu- 
ous. While there are usually several prices in the same 
local market for the same thing — one for the stranger, 
one for the fellow countryman and one for the friend, 
all of these are more or less individual. Some weight 
must also be attached to the period of the day at which 
the bargain is made. In China it is considered very un- 
lucky to lose the first prospective customer, through 
want of tact in bargaining, and a relatively low price 
may thus be accepted from an early buyer. 

136. Money as the standard of value. — The origins 
of money have already been discussed; it is now neces- 
sary to observe the role played by money as the standard 
or measure of the value of commodities. The universal- 
ity of the demand for gold and silver has placed them. 



PRICES 135 

as we have seen, in an unique position as money ma- 
terials. Their relation to one another or the value of 
one in terms of the other is therefore of great im- 
portance. If any other commodities were recognized 
with similar universality, their relation to one another 
would at once become of equal importance because of 
the relation of the group to commodities in general 
which such recognition would imply. 

The relation of gold and silver to one another in re- 
spect to value depends upon three conditions. These 
are i firsts the quantities of each which are in existence at 
any particular moment; second, the net prospective fu- 
ture production witliin a given period, and thirdj the 
status of each of the metals in monetary law. 

137. Quantity of gold and silver in eocistence. — The 
gold now in existence, in circulation as money, hoarded 
by governments or by private persons, and in the form 
of manufactured articles or objects of art — jewelry and 
the like — and the quantity of silver existing in similar 
forms may not be susceptible of precise determination, 
and large quantities of both metals exist in forms which 
can never come into the market in any serious sense. 
Yet the two quantities, unknown though they may be, 
exercise an important influence upon one another, and 
upon those portions of each metal which do come into 
the market. 

The net prospective production may similarly be dif- 
ficult to determine precisely. The production of gold 
and of silver during a specific period may be known 
within reasonable limits of accuracy, and the prospective 
increments during a similar period may be estimated, 
but the quantities which have been used up during a like 
period are more difficult to determine. The abrasion of 
coin can readily be estimated, but it is more difficult 



136 ECONOMICS 

to determine the amount of loss of gold and silver used 
in the arts and the amount lost beyond reach of re- 
covery. 

The net increments, however, as they are revealed 
from time to time, undoubtedly influence the value of 
one metal in terms of the other. Thus a long-continued 
excess of production of gold over the production of 
silver would undoubtedly depreciate gold and appreci- 
ate silver, as a long-continued excess of silver has dur- 
ing recent years had the contrary effect. If suddenly 
there were to appear in India, for example, a long- 
concealed hoard of gold of enormous dimensions, by no 
means an impossible contingency, the value of gold, 
other things being equal, would necessarily decline. 

138. National monetary laws. — If all countries had 
an uniform and unalterable monetary law, changes in 
the relative values of gold and silver would still occur 
through changes in the international trade relations of 
the different countries. But the monetary laws of 
countries within the sphere of international trade rela- 
tions are not uniform, and are more or less frequently 
subject to alteration. 

Thus, for example, Japan possessed at one time a 
silver currency, but altered her monetary law in such 
a way that gold became the standard instead of silver. 
At one time, also, Germany used a large amount of sil- 
ver currency and a relatively small amount of gold cur- 
rency. After the Franco-Prussian war, Germany with- 
drew a large amxOunt of her silver currency and substi- 
tuted gold. France, Belgium, Italy and Switzerland 
(the Latin Union) had an uniform monetary law by 
which the mints of these countries coined all silver 
offered to them at a certain definite proportionate value 
in respect to gold, and then, in 1873, suddenly changed 



PRICES 137 

the law and limited the amount of silver which their 
mints were permitted to coin. 

Changes in monetary laws may produce effects sim- 
ilar to those produced by changes in the relative quan- 
tities of the metals extracted from the mines and sent 
into the market, either through the sudden or gradual 
placing upon the market of quantities of the metals, or 
tlu-ougli the change in demand for currency purposes. 

139. Effect of gold and silver values upon prices. — 
The effect of alterations in the quantity of the metals 
employed for the settlement of international transac- 
tions, however these alterations may be caused, is to 
alter the values of commodities, as expressed in amounts 
of these metals. Thus, an increase in the quantity of 
silver offered in the market depresses the exchange be- 
tween India and Great Britain, because in India prices 
are expressed in silver and in Great Britain prices are 
expressed in gold. Similarly an advance in the price of 
silver, due to excess of demand, will alter the exchange 
between the United States or Canada and China be- 
cause prices in Canada and the United States are ex- 
pressed in terms of gold, and prices in China are ex- 
pressed in terms of silver. 

The fluctuations of international prices from this 
cause alone are very considerable. The initial reason for 
the fall in the price of silver may be very trifling — a 
shipment of a few thousand ounces may cause a fall of 
one or two cents per ounce — ^but all the transactions 
which follow are immediately affected by that circum- 
stance in so far as they take place between silver-using 
and gold-using countries. Thus, at one moment goods 
shipped to China from the United States or from Can- 
ada will be paid for at the rate of 40 cents per gold dol- 
lar, and at the next moment, in consequence of a change 



138 ECONOMICS 

in the value of silver, goods of the same kind will be 
paid for at the rate of 41 cents or of 39 cents, as the 
case may be. 

140. Bimetallism a cure? — The steady decline in the 
value of silver in terms of gold from the liistorical cir- 
cumstances which have been indicated has at times so 
seriously demoralized foreign exchange between gold- 
and silver-using countries respectively that proposals 
have been made from time to time, when the situation 
became unusually acute, to fix once and for all the 
value of silver in terms of gold. Proposals of tliis kind 
have varied in form; but they are usually described 
under the general name of bimetallism because they in- 
volve the acceptance of both metals as a monetary 
standard. 

It has become obvious that only a general interna- 
tional agreement involving also the control of the 
mintage of silver by all countries could effect the desired 
result. Such an international agreement has not yet 
been arrived at. On the contrary, the tendency of the 
commercial nations appears to be to regard silver not 
as an international currency medium but as a com- 
modity, and to allow it to reveal its relation to gold in 
the market as do other commodities. This attitude has 
been brought about largely through the increase in the 
production of gold and through the rise in general 
prices which has occurred from this and other causes. 

Bimetallism, as a propaganda, arose during a period 
of falling prices, and subsided during a period of rising 
prices. The object of bimetallism is to diminish those 
fluctuations of prices which arise in consequence of the 
variation of the value of silver in terms of gold. It is 
thought by those who advocate bimetallism that fluctu- 
ation of prices, involving as it does disturbance of the 



PRICES 139 

economic equilibrium, is an evil, and that it ought to be 
prevented in so far as possible. The causes of price 
fluctuations are, however, very numerous, and many of 
them would not be affected by any change in currency 
laws. 



CHAPTER V 

SOME FACTORS THAT AFFECT PRICES 

141. Climatic variations. — While the prices of com- 
modities are determined in the market, either in the spe- 
cial or in the general sense of the word, by the forces 
of demand on one side and supply on the other, many 
influences contribute to determine the extent and char- 
acter of demand and supply, and to determine the state 
of mind of buyers and sellers respectively. The prin- 
cipal influences are described in this chapter. 

A dry season will cause an advance in the price of 
wheat through the indication which it gives of a short- 
age in the crop. A drought in the United States, Can- 
ada, Russia, Roumania, Germany or Great Britain 
would have this effect. So, also, heavy rains in harvest 
time would "lay" the crop and render harvesting op- 
erations difficult. Some grain would be totally de- 
stroyed. The cotton crop is peculiarly liable to be 
affected by the weather. 

The failure in the harvest of one grain will often 
affect seriously the demand for other grains to take the 
place of the grain in which the shortage has occurred; 
for example, the failure of the rye crop in Eastern Eu- 
rope will have the effect of raising the price of wheat 
and of potatoes because the peasants who customarily 
consume rye will be driven to obtain a substitute. 

Some part of the deficiency in the crop must be met 
by deficiency in consumption, but the demand, in gen- 
eral, will usually be great enough to cause an advance 

140 



SOME FACTORS THAT AFFECT PRICES 141 

in the price of a large range of consumable commod- 
ities should there be a serious deficiency in any impor- 
tant crop, although such a deficiency will diminish the 
resources of the people affected by it. The failure of 
the rice crop in China or Japan or the failure of the mil- 
let crop in Manchuria will not only impose serious suf- 
ferings on the part of the people in these countries, but 
will tend to increase the price of other foodstuffs which 
must be consumed at least to some extent in order to 
support the population. 

An abundant harvest, on the other hand, in any one 
important grain will tend to diminish the prices of all 
foodstuffs as well as to increase the resources of the 
people of the producing area, and thus to increase their 
demand for the commodities habitually consumed by 
tliem. An abundant harvest thus tends to diminish food 
prices, and to increase the prices of other consumable 
commodities. 

142. Effect of war on prices. — The outbreak of war 
affects prices in a complicated way. In the first place 
the prices of war material will be raised in consequence 
of the sudden increase of demand for such material. 
The extent and character of such price movements must 
depend upon the locality and nature of the campaign. 
The campaign against Arabi Pasha in Egypt, for in- 
stance, led to a great advance in the price of mules, 
owing to the great numbers which were required for 
military purposes. During the progress of the South 
African Campaign large numbers of mules and horses 
were purchased in Europe and in America for trans- 
portation and for the cavalry and artillery. The result 
of this extensive increase in demand was a scarcity of 
mules and horses for years afterwards. 

War also increases the demand for canned meats and 



142 ECONOMICS 

the like, for military clothing and for guns and ex- 
plosives. It also tends to diminish supply through the 
withdrawal of w^orking force from field or factory, and 
thus to increase some prices, even though the total de- 
mand should fall off in consequence of the absence of the 
usual consumers. 

During a great war the urgent demand for capital 
in the form of national loans and for increase of the 
public income in the form of taxes tends to raise the 
rate of interest and to divert capital from its customary 
channels. A portion of the demand induced by the war 
is thus diverted rather than reduced; but the diversion 
of capital always causes disturbance to the industrial 
and commercial equilibrium. 

If the theater of war is a grain-producing country 
like Russia, Roumania or Manchuria, for example, it 
might have the effect of diminishing the export of wheat 
either because the ports were blockaded, because of the 
withdrawal of working force for the army or because of 
the actual military occupation of the wheat fields. In 
Manchuria during the Russo-Japanese War the wheat 
trade of the country was practically destroyed by the 
immense extent of the fronts of both armies extending, 
as they did, over a great part of the plain of Central 
Manchuria at Liaoyang and Mukden. 

143. Effect of j)olitical elections. — In England a 
general election affects trade to a comparatively small 
extent. If it occurs, for example, between May and 
August it affects the retail trade of London, and if it 
occurs in harvest time (which is rare) it affects retail 
trade in the rural districts; but in the absence of any 
political issue affecting seriously the business of the 
country as a whole, trade is not usually materially in- 
fluenced. It is otherwise in the case of a Presidential 



SOME FACTORS THAT AFFECT PRICES 143 

election in the United States. The relations of poli- 
tics and commerce in that country are so intimate that 
such an election always affects prices more or less by 
exciting anticipations of an increase or a diminution of 
the tariff. 

144. Changes in 'production. — While the germs of 
the great inventions made their appearance in the 
eighteenth century or earlier, the nineteenth century 
contributed much to their growth. The steam engine 
was improved, although not by any means perfected; 
the railway w^as enormously improved by the applica- 
tion of steam; the steamship, the electric telegraph, 
lighting by gas, the incandescent electric light, the tele- 
phone, wireless telegraphy were all the products of the 
nineteenth century. Already the twentieth century has 
distinguished itself by the improvement of the flying 
machine, and by the enormous development of the auto- 
mobile. These inventions and im]3rovements have great- 
ly multiplied conveniences and have greatly increased 
the desire for them. 

The appetite grows by what it feeds on. The new 
range of commodities, which new inventions imply, re- 
sults in a demand for new resources of supply and for 
subsidiary inventions. The new demand for certain 
commodities induces their exploitation or manufacture 
on an increasing scale, and the cost of production di- 
minishes. The competition of sellers speedily brings 
down the price in spite of, and, indeed, primarily be- 
cause of, the increased demand. The production of 
incandescent gas mantles brought into the market a 
metal tungsten^ which had been previously produced 
only as a curiosity in the laboratory. The same metal 
was later found to be susceptible of utilization for the 
films of incandescent electric lamps. Many chemical 



144 ECONOMICS 

compounds which were used, and even then compara- 
tively rarely, as drugs, and produced in small quanti- 
ties for pharmaceutical purposes, have suddenly made 
their appearance as important re-agents in chemical 
processes on a manufacturing scale. 

To begin with, the wholesale dealers are exhausted, 
perhaps even the druggist shops are ransacked for sup- 
plies, the manufacturers' stores are depleted, and the 
price rises because of the urgent demand. Then the 
manufacturer turns his attention to the new phenome- 
non. He begins to manufacture in quantity. The price 
may rise vigorously before he is able to put his first sup- 
plies on the market. Then if the commodity can be made 
from raw material readily procurable, the manufacturers 
are able ere long to place it on the market in quantity. 
Under the assumed conditions competition will soon 
become active, and the price will soon fall to a point 
even lower than it was before the new demand arose. 
Increased demand has induced increased production, 
and this has reacted upon price. ^ 

While an increase in demand may induce an increased 
production at a diminished cost, a diminution in demand 
resulting in a lower price may induce efforts toward 
reduced cost of production in order to meet without loss 
of profit the conditions of a lower level of prices. This 
is a familiar experience in all manufacturing industries. 
When demand is brisk and prices are high enough to 
yield a manufacturing profit above the average, costs of 
production are not scrutinized closely ; but when demand 
and prices are falling the manufacturer may find him- 
self encountered by the dilemma of reducing the cost 
of production or of going out of business. Since the 

' An episode in the history of Tartrate of Antimony, or Tartar Emetic, which 
occurred about 1880, is used in the above illustratios. 



SOME FACTORS THAT AFFECT PRICES 145 

supply price will under such conditions tend to ap- 
proach the supply price of the marginal manufacturer, 
that is to say, the manufacturer who can continue his 
business at the reduced rate of price, the manufacturer 
who is able to economize in his cost of production to the 
greatest extent, will in a falling market survive longest ; 
and will in a rising market gain most, because although 
his costs may advance later in accordance with a general 
upward movement of prices, they will not likely ad- 
vance all together, and some of his economies will be 
found to be permanent. Exchange thus reacts upon 
production, tending under certain conditions to raise 
the cost of production, and under other conditions to 
reduce it. Production also reacts upon exchange; the 
increase of supply tends to depress price and the diminu- 
tion of supply to enhance it. 

145. Variation in relations of commodities. — Such 
variations are closely related to those caused by the in- 
vention of new processes; but they are also related to 
the substitution of one commodity in a group for an- 
other in the same group because of certain of the util- 
ities of which the latter may be susceptible under 
certain conditions of prices. 

Cotton will be substituted for linen for certain pur- 
poses when the price of cotton advances; for certain 
other purposes, for surgical dressings, e. g., linen must 
continue to be used no matter what the price may be. 
Linen will be substituted for silk under certain condi- 
tions of the price of silk. If the price of silk falls, there 
will be a tendency for silk to be used in preference to 
linen; e. g., in the Far East and in Hussia silk is made 
from the cocoons of the silkworms, which is not so fine 
or so regular as those made by silkworms under care- 
ful cultivation of the mulberry. This rough silk is ex- 

C— I— 10 



146 ECONOMICS 

tensively used for male clothing because it is light and 
durable, and clotliing made of it is only twice the price 
of linen. If the price rose above this proportion, there 
would be a tendency to substitute linen. 

During the South African war there was a great 
demand for light woolens, and the price of fine numbers 
of woolen yarns advanced. The use of "unions" or mix- 
tures of wool and cotton increased considerably, cotton 
being substituted for wool in the manufacture in order 
to diminish the cost of production. The manufacturers 
were thus enabled to maintain the price (although the 
goods were inferior) , and thus to sustain the demand. 

The preparation of attractive designs or styles in a 
relatively cheap material often diverts demand to it 
from more expensive material in which the designs are 
less varied and attractive. This is the case especially 
during periods of depression when incomes are relatively 
low. The use of French foulards or fine printed calico, 
for which Mulhouse became famous, superseded to some 
extent, between 1877 and 1886, the use of silk and satin 
in ladies' dresses. Printed linen about the same time 
superseded hair cloth and other relatively expensive ma- 
terials in upholstery. 

146. Applied to metals. — In the markets for metals 
an advance in the price of iron will diminish the differ- 
ence between that price and the price of other metals 
like copper (which is even more suitable than iron for 
many purposes for which iron is customarily used when 
the j^rice of copper is relatively high.) If, for ex- 
ample, copper nails were five times the price of iron 
nails and lasted four times as long, iron nails would be 
less costly to use; but if iron advanced until the price 
of copper were only three times the price of iron, it would 
be more economical to use copper nails for all those pur- 



SOME FACTORS THAT AFFECT PRICES 147 

poses in which durabihty was an important considera- 
tion. 

On the other hand, if the price of copper rose instead 
of the price of iron, there would be a tendency for iron, 
especially galvanized iron, to be used for many of the 
purposes for which copper had previously been em- 
ployed. For those purposes, however, for which copper 
in the existing state of technical knowledge is indis- 
pensable, copper would continue to be employed to 
whatever height the price might go. For many electri- 
cal purposes, for the construction of magnetic observa- 
tories, and for the outer sheathing of wooden ships, the 
use of copper is at present indispensable. In the event, 
however, of the price becoming very high, it would come 
into competition for some purposes with silver. 

The diversion of demand from one member to another 
of a complementary group leads to an advance in the 
price in response to the increased demand, although, 
owing to the increased production in response to that 
demand, the price may eventually fall below its previous 
point. Thus a demand for aluminum, nickel and man- 
ganese has led to the production of these metals on an 
increasing scale, and to reductions in their prices. For 
certain purposes they compete with one another and 
with other metals. 

The expression "complementary commodities" also 
applies to groups of commodities which are either man- 
ufactured together and are therefore subject to joint 
cost or are utilized together in one manufacturing 
process. In the reduction of copper ores, for instance, 
other metals than copper are produced, although their 
production is not the chief object of the process of re- 
duction ; and in the smelting of iron, coal is used. Cop- 
per, antimony, silver and sometimes other metals are 



148 ECONOMICS 

thus in one sense complementary, and coal and iron 
are complementary in another sense. 

147. Changes in consuniption. — Increase in popula- 
tion occurs from two causes ; from natural increase — the 
number of births minus the number of deaths — and net 
immigration — that is, immigration less emigration. A 
net increase of the population involves an increase of 
demand unless the character of the new population in 
respect to consumption and to effective demand is 
inferior to that of the former population. There is, 
indeed, always a difference in consuming power. An 
increase in the birthrate does not necessarily mean an 
immediate increase in the demand for food customarily 
consumed by adults. Yet if this increase continues for 
some years, the increased demand of the growing chil- 
dren will become noticeable. 

Italian immigrants on their arrival in New York were 
reported a few years ago as being frequently so habitu- 
ated to scanty fare that they were unable to eat a gen- 
erous meal. Gradually they acquired the power to 
consume more largely. The great improvement in the 
economical position of Southern Italy has probably 
rendered this observation less true. The Italian immi- 
grants to Patagonia are reported to have acquired the 
habit of eating enormous quantities of meat, a diet to 
which they were wholly unaccustomed in their own 
country. 

The gradual assimilation in respect to quantity and 
character of consumption of the new to the old popula- 
tion results inevitably in an increase of consumption 
and, as the added population begins to affect production, 
eventually in a great increase of eff'ective demand and 
of supply alike. 

148. Growth of population in urban centers. — Varia- 



SOME FACTORS THAT AFFECT PRICES 149 

tions in price which are due to increase of population 
are most conspicuously noticeable in the case of rapidly 
growing urban centers. The growth of towns is no new 
phenomenon, nor is it confined to America. The ancient 
democracies were created by the towns as modern 
democracies are maintained by them. Concentration 
of population on particular sites has been due in former 
times to many causes. Such a concentration may be due 
to the fact that the site is a strategic point for defense 
like Edinburgh and Quebec, for political administra- 
tion like Rome and London, for trade like Venice, Chi- 
cago and Montreal, or for communication like New 
York, whose harbor has made it the point of contact 
between the new world and the old. Towns grow 
round shrines as Nikko in Japan, round ecclesiastical 
buildings as many of the cathedral cities in England, 
round groups of scholars as Oxford and Cambridge, or 
in the center of agricultural regions like Moscow and 
Winnipeg. The sites of those modern cities which have 
been deliberately planted like St. Petersburg, Wash- 
ington and Ottawa have been chosen chiefly with a view 
to their suitability for political administration. Some 
cities are founded with difficulty upon their sites — 
whether selected or the result of accidental occurrence. 
St. Petersburg and Chicago are largely built upon 
piles in swamps; Venice and Amsterdam were built in 
the sea. 

149. Causes for movements of population. — Concen- 
tration of population in urban areas in modern indus- 
trial countries occurs from one or the other of two gen- 
eral groups of causes: first, those causes which arise in 
the cities and towns, the attraction of higher wages for 
industrial than for agricultural employment, the attrac- 
tions of social life, facihties for education and the like; 



150 ECONOMICS 

and, second, those causes which arise in the rural dis- 
tricts, the isolation of the farms (especially in those 
parts of a country where the system prevails of grant- 
ing to railways and to homesteaders alternate sections), 
the arduousness of agricultural hfe, the deficiency of 
comfort in the farmhouses, the absence of general so- 
ciety, the friction generated by intimate contact with 
a small number of persons unrelieved by variety, the 
arbitrariness of the chiefs of the farming community, 
their deficient sense of justice, their sordidness and some- 
times their inefficiency as agriculturists — defects which 
render it difficult for the farmer to secure hired assist- 
ance, and even to retain the services of his own family, 
whom he habitually undervalues and underpays. The 
flights of peasants in Eastern Europe from excessive 
burdens have their counterpart in the flight of the farm- 
ers' sons from the yoke of farm labor in nearly all 
agricultural countries under the conditions of commer- 
cial farming. 

Rural depopulation occurs through migration to other 
rural districts, to the towns or through emigration. In 
any case it tends to diminish the working force and to di- 
minish local production. Migration may, however, tend 
to improve the condition of those who remain as well 
as of those who migrate, the first through the increase 
of agricultural wages due to the relative scarcity of 
labor, and the second through the transference of their 
labor to a more remunerative field. The congested dis- 
tricts of Ireland, Eastern Austria, some parts of Cen- 
tral Russia and many parts of Southeastern China 
have been relieved at least temporarily by emigration. 
Rural depopulation has occurred in Ontario in conse- 
quence of migration to the Ontario towns, to the prairie 
provinces and to the United States. In Great Britain, 



SOME FACTORS THAT AFFECT PRICES 151 

rural depopulation proceeds at a rapid rate stimulated 
by the industrial prosperity of the towns and by emi- 
gration. It is not a little remarkable that while in 
Great Britain and in America complaints should be 
made of the undue urbanization of the population, pre- 
cisely opposite complaints should be made in India, 
where the decay of industries in the towns has led to the 
ruralization of the people. 

150. Eifect on piices. — The movements of popula- 
tion result in diminished demand from the places which 
the people leave, and increased demand in the places to 
which they go. Deficient harvests in the upper valley 
of the Dniej)er, in 1899, caused so great a decline in 
the demand of the peasant villages that the towns (like 
Mohilev) were struck by industrial depression. Artisans 
and traders were forced by this depression to leave the 
towns for cities (Smolensk, ^iinsk, Warsaw, etc.) , or to 
emigrate to America. The cities gained in population, 
wages fell and there were industrial disturbances owing 
to the fall of wages. Meanwhile the ruin of the small 
towns affected the distribution of country produce, and 
prices in the cities advanced in consequence of the in- 
creased population (although the power of consump- 
tion per head had doubtless diminished) and in conse- 
quence of the restriction of supply. 

But the advance of prices in the cities penetrated to 
the producing areas, and in course of time economic 
equilibrium was again restored. 

In the countries to which the emigrants went, the de- 
mand was increased by the inrush of new consumers, 
and in spite of the increase of production, which was 
the result of the immigration of industrious people, 
prices tended to advance because there was a net increase 
in the consuming power of the newcomers. It is well 



152 ECONOMICS 

recognized that no matter how frugally immigrants may 
have lived in their native country, they quickly adopt 
more extravagant habits whenever they are able to do so. 

151. Changes in standard of comfort. — Changes in 
the standard of comfort, especially when they extend to 
the mass of the people, exercise an important influence 
upon demand. Such changes are induced either by in- 
creased resources in the form of increased wages or 
other incomes, or they are induced by increased sup- 
plies of certain commodities resulting in diminished 
prices. In the eighteenth century, the customary 
household beverage was home-brewed beer. Tea was 
used sparingly even by the well-to-do classes. In 
the early part of the nineteenth century tea was still 
relatively expensive and was rarely consumed by the 
working population. The development of tea planta- 
tions, especially in India and in Ceylon, where tea plant- 
ing is very skillfull}^ conducted, has in competition with 
the teas of China and Japan resulted in a greatly in- 
creased supply and a considerably reduced price. 

The masses of the people in Great Britain now con- 
smne tea as in Continental Europe generally the masses 
of the people consume coffee. The greatly increased 
demand has been responded to by increased supplies, 
and prices have therefore not risen, the change having 
been gradual and the business of tea-growing having 
attracted abundant supplies of capital. 

The situation is somewhat different in the case of beef. 
In the beginning of the nineteenth century agricultural 
laborers and even small farmers consumed beef very 
rarely. The town artisan did so less infrequently but 
still seldom. 

The advance of wages and, no doubt, also the greater 
arduousness of labor, induced increased consumption of 



SOME FACTORS THAT AFFECT PRICES 153 

beef, especially in the great industrial centers. The con- 
sumption of beef per head went up enormously. The 
supply was procured from the Western plains where 
cattle ranching- was conducted on a large scale. But 
the drift of population westward caused the settlement 
of large tracts of country previously used as cattle 
ranges (as in Southern Alberta, for example). Settle- 
ment was more profitable than cattle raising and the 
ranchmen sought remoter places or went into grain or 
mixed farming. 

The supplies of stock, instead of increasing with the 
demand, diminished with it. Greater economies were 
exercised in dealing with beef, yet the price of beef has 
advanced more or less steadily — a consequence on the 
one hand of the change in the standard of comfort which 
induces the mass of the people to consume beef when 
formerly they did not do so, and on the other hand of 
the relative diminution of the available sources of supply 
in face of the increasing demand. Changes in standard 
of comfort divert demand into new channels and fre- 
quently lead to the disuse of commodities previously 
extensively used. In some respects such changes are 
indistinguishable from changes of fashion, 

152. Changes of fashion. — For ages changes of fash- 
ion have been important causes of variation in price. 
This cause of variation affects particularly articles of 
luxurious consumption, especially the finer textiles and 
jewelry. Materials like bombazine and plush, which 
were formerly in extensive use, are now almost unknown. 
The factories where they were once made in quantity 
are now closed or diverted to other products. 

Risks of changes in fashion are so great that in order 
that the businesses affected may be continuous, such 
risks must be taken into account in determining the 



154 ECONOMICS 

supply price. A certain number of the commodities 
subject to these risks may be sold in the beginning of 
the season at or near this estimated supply price. At 
the close of the season, the remainder are either sold at 
a reduced price — that is, at the demand price of the time 
— or they are retained for subsequent sale or for remanu- 
facture. 

Fashions sometimes come round again and those who 
have been able to keep their stocks may benefit. Some- 
times, indeed, old-fashioned things attain a high value 
because of the demand for them on account of the ex- 
cellence of their manufacture or because their production 
in the old manner has ceased. Examples of this phe- 
nomenon are Paisley shawls and Sheffield plate. 

Jewelry which has gone out of fashion is customarily 
melted and remanufactured, hence the high prices which 
antique jewelry of fine design brings in the market. 
Precious stones are set and reset. 



CHAPTER VI 

EFFECTS OF COMPETITION AND MONOPOLY 

153. Comijetition. — In the history of all commodities 
there have occurred periods of relative abundance and 
relative scarcity — abundance when consumers or pur- 
chasers have had the advantage of producers or sellers 
competing- with one another, and scarcity when pro- 
ducers and sellers have had the advantage of consumers 
or purchasers competing with one another. Indeed, 
there are few commodities in the production, transporta- 
tion or retailing of which there is not discoverable at 
some point an element of scarcity or quasi-monopoly. 
It is useful to assume the existence of an atmosphere of 
universal competition, because in the absence of some 
assumption of this kind no constructive reasoning could 
be conducted; but it must be realized that continuous 
correction must be made on account of the divergence 
of actual conditions from those which would occur in 
an atmosphere of unrestricted competition. 

Within the area of the market every buyer of goods 
of a certain kind is a competitor of every other buyer 
of such goods. So, also, eYevj seller competes with 
every other seller of goods similar to his own. The 
competition of sellers determines the sellers' price and 
the competition of buyers determines the buyers' price. 
If the sellers are many, and if their urgency to sell is 
great, the competition may be almost fierce. A remark- 
able instance of the fierce competition of eager and 

155 



156 ECONOMICS 

urgent sellers may be found in the narrow streets of 
retail shops in ]Minsk in Poland. There the numerous 
sellers of all kinds of wares crowd the pavement offer- 
ing their goods to all passers-by, almost dragging them 
by main force into the narrow doorways of their little 
places of business. Perhaps nowhere in the world is 
competition for trade so manifestly keen. 

If the buyers are many and their urgency to buy is 
great the competition among them may be equally fierce. 
Before places of amusement where there are no regular 
arrangements for orderly purchase of tickets, the 
struggle for admittance is often almost ferocious. 

If, on the other hand, either buyers or sellers are few 
in number, and if the quantity of goods which buyers are 
prepared to buy is known by them to be less than the 
quantity offered in the market, or if sellers are indifferent 
because they know that the quantity of goods available 
for sale is less than the quantity demanded, the competi- 
tion in either case is slender. Where buj^ers are in the 
strongest position they will be able within certain limits 
to dictate their terms ; and where sellers are in the strong- 
est position they also will be able within certain limits 
to dictate their terms. The limits will be defined in the 
first case by the urgency of the sellers and in the second 
case by the urgency (taking into account the resources) 
of the buyers. 

154. Monopoly. — If there are many buyers or sellers 
respectively, there is competition ; if there were only one 
buyer or seller there would be an economic monopoly 
in the strict sense. For a private person to acquire a 
monopoly either of purchase or sale is very unusual, but 
it does occur occasionally. A certain celebrated inter- 
national banking house is understood to have a complete 
monopoly of the supply of mercury throughout the 



COMPETITION AND MONOPOLY 157 

world. This monopoly can only be sustained by this 
house by the immediate purchase of quicksilver mines 
wherever these are reported to have been found, to- 
gether with the constant employment of experts in 
prospecting for quicksilver. This is probably the only 
instance of a complete and absolute monopoly. 

155. Mo'iiopoly prices. — In the event of a private per- 
son procuring by any means a complete monopoly, he 
might fix any price for the commodity he pleases, pro- 
vided he were able out of other resources to defray the 
cost of maintaining the monopoly and simply wait for 
that price. If, however, he desires to make his monopoly 
remunerative, this is not his best policy. The most re- 
munerative price for him is that price which will secure 
the largest net profit. That price cannot be the high- 
est price which he might secure from the most urgent 
buyer — for in any market there are few urgent buyers. 
It must be the price which wdll attract buyers for the 
quantity which will yield the greatest profit. For ex- 
ample, if a price of $10 per unit of quantity attracted 
buyers who purchased sufficient to give at this price a 
profit of $1,000 a year, and if a price of $1 per unit of 
quantity attracted buyers sufficient to produce a profit 
of $10,000 a year, clearly it would be more advantageous 
for the monopolist to fix a price of $1 than to fix one 
of $10. It might be that as the result of experiment he 
found that a price of 90 cents would yield only $9,000 
a year, and in the interests of his business he would feel 
himself justified in maintaining the price at $1, 

156. Government monopolies. — A more usual case of 
complete monopoly is the Government or legal monop- 
oly in which within the boundaries of its own country a 
Government declares itself to be the possessor of a mo- 
nopoly of a service or of a manufacture and prosecutes 



158 ECONOMICS 

any one who infringes this monopoly » Examples of the 
first kind of monopoly are the Post Office service in all 
countries, and the telegraph, telephone and railway 
service in some countries and the municipal monopolies 
of water, gas, electric lighting and power, and street 
railway services. Examples of the second are to be 
found in the tobacco monopoly of Austria, and the play- 
ing card and vodka monopolies of Russia. 

Monopolies of public services and of manufactures 
held by a Government are subject to precisely the same 
contingencies as a non-political and purely mercantile 
monopoly, excepting that the Government may or may 
not regard the acquisition of profit from its monopoly 
as sound policy. This aspect of the question is discussed 
more fully in a later section; for the purposes of the 
present exposition it may be assumed that the Govern- 
ment monopoly is worked in such a way as to secure a 
maximum profit for the Govermnent. 

Here, again, it is clear that the price which will se- 
cure the greatest profit is not the price which will be 
paid by the most urgent buyer; but is rather the price 
which will cause the utmost use of the monopoly to be 
made by the largest number of persons compatible with 
the maintenance of the service at the point of maximum 
net yield of profit. 

157. Monopolies subject to law of substitution. — It 
should be observed, however, that the law of substitution 
mitigates very seriously the advantages of all monop- 
olies, public and private. The essence of the law of sub- 
stitution is that when the price of a commodity reaches 
a certain point, some other commodity will be substituted 
for it. In the case of mercury this is very difficult be- 
cause for nearly all the uses to which mercury is put, no 
substitute has been found. Yet for some uses, other 



COMPETITION AND MONOPOLY 159 

substances will serve nearly equally well. Ther- 
mometers may be filled with alcohol or with mercury 
almost indifferently; barometers may be made of other 
metals than mercury, although they are not quite so re- 
liable for long periods as mercurial barometers. In the 
case of a Government monopoly in which a large amount 
of public funds is invested, it may become absolutely 
necessary, in order to protect the original monopoly, to 
acquire the substitute for the original service or com- 
modity as well. 

158, Practical effect of a typical case — The most con- 
spicuous instance of this is to be found in the history 
of the English Post Office. When the first Post Office 
Act was passed, the Postmaster-General, under the ad- 
vice of the law officers of the Crown, took powers to 
entitle him to prevent any person not explicitly author- 
ized or licensed by him from carrying any message for 
payment. This sweeping monopoly was very difficult 
to enforce in detail; but in general terms it was thor- 
oughly enforced. 

The railway companies were forbidden to carry let- 
ters unless they were stamped with postage stamps in 
addition to any charge the railway companies might 
make for carrying them. 

When the first electric telegraph company was estab- 
lished ki England, the company was notified that the 
business it proposed to conduct was a violation of the 
Post Office monopoly. It was, however, granted a li- 
cense by the Postmaster-General. 

When messenger services were established in the large* 
cities they also were licensed. Under the pressure of 
public opinion the Government acquired the telegraph 
systems of the companies which were conducting the 
business. Under the same pressure the rates for tele- 



160 ECONOMICS 

grams were from the beginning placed at a point which 
has turned out to be hopelessly unremunerative. 

When the telephone system made its appearance the 
Postmaster-General at once notified the promoters that 
they would require a license from him to carry on their 
business. Eventually, in order to protect the telegraph 
and the Post Office monopoly, the Government was 
obliged to agree to purchase the telephone system. 
When wireless telegraphy made its appearance again 
the Government interposed and licensed it. Ere long, 
doubtless, it also will be acquired. 

In spite of all the force behind the Government, it is 
with difficulty able to cope with the economic conditions 
brought into being by streams of new inventions. Even 
political monopolies are thus extremely difficult to main- 
tain. 

159. Quasi-monopolies. — A miore familiar example of 
mitigation of competition is effected by quasi-monopolies 
— in which not the whole of the supply of a commodity 
but a large part of the supply is brought under the con- 
trol of a group of persons who act in concert or in co- 
partnership. This phenomenon, known widely as the 
"trust," will form the subject of further discussion in 
another place; here it may be observed that the limit 
to the action of monopolies applies also to quasi-monop- 
olies whether they are in the hands of "trusts" or not. 
The law of substitution applies equally to both as does 
also the principle of maximum profit. In the case of 
the quasi-monopoly the highest price is not the most 

.profitable price; and there is also to be regarded as an 
important factor in the determination of price, the fact 
of the competition of the sometimes formidable rivals. 

160. Monopoly prices excessive? — Whether the price 
of a commodity like mineral oil would be lower or higher 



COMPETITION AND MONOPOLY 161 

if the manufacture and distribution were in the hands 
of a large number of competing producers, each adver- 
tising his own product, instead of being in the hands of 
a few powerful companies competing with one another, 
is a question to which no decisive answer can be given. 
Competition between two large producers may be as 
effective in reducing the supply price, especially when 
demand is doubtful or declining, as it would be among 
hundreds of small competitors. Indeed, the fear of 
trusts may be regarded as being due rather to the ag- 
gressiveness of their competition than to the fact that 
they exercise monopolies. 

161. The situation in the U. S. — The attacks upon 
corporations in the United States may perhaps justly 
be attributed to the fundamental individualism of the 
American people. Their genius seems disposed rather 
to independent, individual action than to corporate or 
even co-operative action. It seems to have been so from 
an early period. The intense local patriotism of the 
several States rendered the Union hard to accomplish 
and after it was accomplished it seemed likely at one 
moment to break it up. 

Industrially the earlier American enterprises were fur- 
nished with capital from abroad, and, eager as the peo- 
ple seemed to be for loans of money to exploit the re- 
sources of the country, they could not avoid dislike of 
their creditors. Capital in general thus bore a foreign 
aspect, and the relations between the representative cap- 
italists and the small merchantry were strained from the 
beginning. The struggle between the large capitalist 
and the small one really began in the United States in 
the thirties of the nineteenth century ; that struggle long 
ante-dated the appearance of the trusts. 

It is not a little remarkable that the co-operative move- 
c— I— 11 



162 ECONOMICS 

ment which has taken such a hold of Western Europe has 
obtained a very slender footing in the United States 
and even in Canada. While undoubtedly the people of 
both countries have developed a remarkable power of 
common activity — that is, of spontaneous organization 
toward common ends — they appear to be averse to for- 
mal association of this kind. They seem to think that 
every man should have the opportunity to make the best 
of his powers, by combined or by individual action as he 
sees fit, and that formal combinations militate against 
this freedom of action. The American maxim, "Give 
every man a chance," expresses antagonism to those com- 
binations whose operations appear to tend toward 
diminution of such chances. 

162. Land monopoly .—An important case of alleged 
monopoly to which the above considerations apply is the 
ownership of land. Although it is true that a person 
who possesses a particular piece of land to the exclusion 
of everyone else, possesses a monopoly, the same is true 
of the possession of any commodity similarly commer- 
cialized. We have seen that the commercialization of 
land or the imparting to land of the mobility as regards 
possession, which is characteristic of other forms of prop- 
erty, succeeded earlier kinds of land tenure. These 
earlier tenures fell into decay or were abolished because 
of the decay and abolition of serfdom, because of the 
scarcity of agricultural capital and because of the diffi- 
culty of procuring free, hired agricultural labor. When 
immense areas of land were held by the State and 
granted to military chiefs or to other influential persons, 
such land was neither bought nor sold and was held as 
a monopoly. 

Commercialization of land altered this and, so to say, 
placed land at the disposal of the highest bidder. The 



COMPETITION AND MONOPOLY 163 

alteration of the laws of inheritance and the adoption 
of the practice of paying for services to the State by 
means of money instead of by means of grants of land, 
have together brought about the commercialization of 
land. 

It is true that this fact does not prevent land from 
being monopolized; but where all land owning is com- 
mercialized, there is nothing so hard to monopolize as 
land because there is so much of it. The owners of dif- 
ferent areas of land compete with one another in the 
market for land as the owners of goods compete in the 
markets for goods. Real estate dealers advertise their 
town lots in western towns in the same way as manufac- 
turers advertise their wares, and they employ similar 
devices in displaying the advantages of what they have 
to sell. 

163. Fluctuation of land prices. — In all countries the 
history of the prices of land has shown that the price of 
land is subject to great fluctuation. 

Between 1880 and 1890 the price of agricultural land 
in England fell sharply. Many farms in the chief agri- 
cultural counties were let at "peppercorn" rents — that 
is, for the mere payment of taxes upon them. Urban 
lands advanced between about 1874 and 1876, but since 
that period the prices have not advanced materially ex- 
cepting in the business centers of the towns. 

In the United States and Canada, similar fluctuations 
may be observed. The opening up of the western 
states led to the abandonment of farms in the eastern 
states as the attraction of the prairie provinces has led 
to rural depopulation and the fall in the price of land 
in Ontario. 

Booms and subsequent collapses are familiar incidents 
in the cities of both countries. The acquisition of farm 



164 ECONOMICS 

lands at the normal prices for such lands and the build- 
ing of a hotel by a shrewd and enterprising speculator 
who skillfully engineers it into the position of a fashion- 
able resort, will induce demand for land in the neighbor- 
hood and will therefore increase its price. The stream 
of fashion may make the surrounding country very val- 
uable to the owners of land, until caprice or interest 
turns the stream in another direction. In former days 
people went to Saratoga for recreation; now they go to 
Virginia Hot Springs, Atlantic City, Bar Harbor or 
Newport, Rhode Island. 

Round every growing city new residential districts 
tend to develop, and these compete with one another 
more or less vigorously. The difference between the 
price of farm lands and urbanized land is represented 
by the cost of organizing it for its new use by drainage, 
by setting off allowances for streets, by advertising it, 
by interest upon the investment, and by the cost of ad- 
ministration. The result of these operations may be the 
sale of the land at a profit or, in the absence of demand 
owing to miscalculation or misfortune, the whole region 
may relapse into agricultural land or remain idle for 
years. 

164. Competition in land selling. — Continuance of 
rapid growth of large towns cannot be counted upon. 
It is true that land acquires a value through demand — • 
in other words, through the settlement of a community 
upon it; but if the community does not settle or if it 
leaves the place of its settlement, demand and value 
alike decline. Much of the so-called site value of urban 
j)roperty is peculiarly liable to fluctuation owing to the 
caprice of demand. And at a street corner, which ap- 
pears to offer a strategic point for the conduct of a par- 
ticular business — a bank, a railway ticket office or the 



COMPETITION AND MONOPOLY 165 

like — changes hands at a price greatly in excess of the 
price of another part of the same block. Such a transac- 
tion is not due to monopoly but is due to effective de- 
mand of a special character. Cases frequently occur of 
owners of an advantageous site of this kind holding on 
too long and thus missing the market. 

Cities and even countries compete against one another 
in the land market. Thus if a manufacturing firm, de- 
siring to establish itself in Buffalo or Toronto, found 
that land was being held in both places at what was 
regarded by its advisers as an exorbitant price, it might 
be advantageous to purchase land elsewhere — at Toledo 
or at Hamilton — where land could be had more cheaply, 
provided the business could be carried on with equal ad- 
vantage in the smaller city. 

Cases frequently occur in which it is a matter of in- 
difference to the promoters whether an industry is es- 
tablished in the United States or in Canada. In such 
cases the local factors play a large part — facilities for 
obtaining labor and material and the cost of the land. 
If, other things being equal, a suitable site could be ob- 
tained at a less price in Canada than in the United States, 
the industry would be established there. On the fron- 
tiers of the countries in Central Europe similar condi- 
tions prevail. A local land "monopolist" w^ho insists 
upon exorbitant prices is a kind of scarecrow, frighten- 
ing people away from his land and making nothing of it 
i himself. 

165. Rates of interest affect land 'prices. — There is a 

; definite connection between the demand price for land 

and the rate of interest for money. When money is 

scarce and the rate of interest is high, the demand for 

i land is slender because the speculative element is limited 

or eliminated. When the rate of interest on loans upon 



166 ECONOMICS 

the security of land rises, some holders of land must sell, 
if they can, and others, who would otherwise have bought, 
will refrain from buying unless for purposes of their 
business they are obliged to buy. 

So, also, when the rate of interest falls, the price of 
land where property in land is mobile tends to rise. 
The phenomenon of an advance in the price of land con- 
sequent upon a fall in the rate of interest has been il- 
lustrated on a large scale in Egypt. Prior to the Brit- 
ish occupation the rate of interest was very high, most 
usurious rates being customarily exacted, with the bas- 
tinado as a penalty if the amounts due were not paid. 
Under the Egyptian regime, the price of land was low, 
partly owing to the instability of the government, but 
more largely owing to the high rate of interest which 
deterred borrowing for the purpose of purchasing land, 
and which induced the owners of capital to refrain from 
lending for long periods. The International Tribunals 
and, later, the Egyptian courts of law, supervised as 
the latter were by the British Government in Egypt, put 
and end to the bastinado and to usury. The rate of inter- 
est fell to normal amounts because abnormal rates could 
not be recovered and therefore would not be paid. 

One of the immediate consequences of the fall in the 
rate of interest and of the increased stability of the 
government was an increase in the demand for land and 
a rapid increase in the price. There was a furore of land 
speculation in Cairo; but a more important incident 
was the increase in the value of agricultural land coupled 
with its increased productivity owing to the control of 
the Nile waters by means of the great engineering 
works erected by the British Government. The position 
of the land-owning fellahin was greatly improved; but 
the position of the landless fellahin was not so obviously 



COMPETITION AND MONOPOLY 167 

altered. lie found that the price of money had fallen, 
but the price of land had risen to a greater extent. His 
annual payment on account of interest upon capital in- 
vested in an acre of land had therefore increased. The 
greater productivity of the land enabled him more eas- 
ily to meet the additional charge than he would other- 
wise have been able to do, but there was little if any net 
pecuniary advantage. 

The extensive speculation in land by farmers in the 
northwest of Canada has been due to the facilities for 
borrowing which the farmers have enjoyed, and to the 
relatively low rates of interest at which they could bor- 
row. This condition led to rapid advance in the price 
of land so long as effective demand was sustained. With 
the rise in the rate of interest the increase in the price 
of land was checked. In the event of interest advancing 
still further, the price of land must fall. 

The price of land, like the price of commodities, thus 
depends upon a series of complex causes acting through 
demand and supply. 

166. Changes in geographical relations. — The great 
trade routes of "unchanging Asia" have retained their 
importance for many centuries, many of them retaining 
even their primitive character. Long lines of camels 
may be seen carrying merchandise from Peking through 
the Nankow pass and by Kalgan on the outer Great 
Wall of China into ^longolia for the JMongol traders, 
as Marco Polo saw them nearly seven centuries ago. 
Similar lines of camels may also be seen in the Trans- 
caspian region, competing with the railways for distances 
of a thousand miles. 

The trade routes of European traders have, however, 
altered many times, and alterations have sometimes im- 
posed immense sacrifices. In the prime of Venice her 



168 ECONOMICS 

traders conducted a large part of the traffic between 
Persia, India and Europe through Asia Minor. The 
discovery of the Cape Route to India diverted the major 
portion of Venetian trade to Lisbon and London, while 
Cape Town became an important strategic point. The 
opening of the Suez Canal did not revive Venice^ but 
it gave a new strategic importance both in a mercantile 
and in a military sense to Egypt and to Gibraltar. Al- 
though France built the Suez Canal, Great Britain 
profited by it to the greatest extent. Her hold on India 
was strengthened and her trade with that country, with 
China and with Australia and New Zealand was greatly 
facilitated. 

The whole range of prices of the products of these 
countries and of the goods consumed by them was al- 
tered. Trade which was formerly periodical became 
continuous. The voyages no longer depended upon the 
monsoons. The increasing velocity of the returns to 
capital, which the shorter route rendered possible, en- 
abled larger and more powerful vessels to be employed. 
There was a more eager competition for an enhanced 
trade and freights were reduced in consequence. 

The effects upon prices extended not merely to their 
amount, but extended also to their fluctuations. An in- 
crease of the demand in the Bazaars of India, for ex- 
ample, could not under the former conditions be felt in 
Europe for months. After the opening of the Suez 
Canal and the establishment of numerous lines of fast 
steamers between Europe and Bombay, goods might be 
ordered from India and delivered within about one 
month. The whole fabric of Eastern trade was altered. 

Scarcely less significant was the rounding of Cape 
Horn and the development of European trade on the 
Pacific slope of South America. The opening of the 



COMPETITION AND MONOPOLY 169 

Panama Canal is certain to produce complicated reac- 
tions. Much of the external, and perhaps some of the 
internal, trade of the United States must be affected by 
it. Its influence upon the price of grain in Europe, 
owing to the diminution of freight rates between Cali- 
fornia, British Columbia and Europe, may result in the 
entrance into the European competitive market of grain 
which at present cannot be shipped there. If this occurs 
the price should be less than otherwise it would have 
been. 



CHAPTEK VII 

MONEY AND CREDIT IN RELATION TO PRICES 

167. Eocpansion and contraction of credit. — When 
for any reason credit expands, more capital is available 
for industrial purposes, more people are employed, more 
wages are paid. Consequently, demand for commodities 
increases and prices tend to advance. When for any 
reason credit contracts, people refrain from making pur- 
chases except for immediate needs, loans are recalled 
and stocks of goods have to be thrown upon the market. 
The visible supply of goods is thus suddenly increased 
at a moment when demand is contracted. The conse- 
quence of these conditions is a fall in prices more or less 
widespread in proportion to the suddenness, severity and 
duration of the crisis. 

Contraction of credit may occur through anticipation 
on the part of the lending and investing classes of a 
deficient harvest or of a war, or it may occur because in 
the opinion of such classes speculation has forced prices 
above the point at which there can be sustained demand ; 
or credit may be contracted merely because it is more 
profitable under the existing conditions of the money 
market to hold highly liquid rather than less easily 
realizable securities. Expansion of credit occurs when 
the process of contraction has obviously gone too far, 
when unemployed funds accumulate in the hands of in- 
vestors and when their incomes fall in consequence. 
When credit contracts, people begin to hoard money, 
and they let it pass out of their hands again as the rate 

170 



RELATION TO PRICES 171 

of interest for urgently demanded funds gradually ad- 
vances. 

168. Effect of quantity of 'money in circulation. — The 
role of money in the process of exchange and the position 
acquired by the precious metals in the category of money 
have already been discussed. The demand for money 
for purposes of exchange and the demand for precious 
metals is as real a demand as that for any commodity 
in the category of commodities. Some gold and silver 
are demanded for various purposes in the industrial and 
fine arts— photography, dentistry, jewelry, medals and 
the like — and some for the manufacture of coins, either 
immediately or potentially. If all transactions were 
settled by means of cash payment in coins, it would be 
clear that the larger the volume of trade — given a cer- 
tain rate of movement of that volume — the greater 
amount of coins would be necessary for the movement 
of trade. When the conditions are as assumed, and 
there occurs a shortage of currency, trade is impeded 
from that mere fact because exchange is rendered less 
easy. In so far as the actual conditions approximate 
to the conditions described, it comes to be very impor- 
tant that there should be sufficient currency on any given 
occasion to enable the required payments to be made. 

169. Periodical payments. — In Scotland rents of 
houses and of some lands are customarily paid at the 
two half-yearly terms of Whitsunday (June) and Mar- 
tinmas (November). It is usual for the Scottish banks 
to withdraw from London, immediately prior to these 
term days, not less than from $10,000,000 to $15,000,000 
in gold in order to provide the currency necessary for 
anticipated payments. The gold is used in circulation 
only to a small extent ; it serves chiefly as the basis for 
the issue of the bank notes which are employed for the 



17£ ECONOMICS 

payment of rents. When these notes return to the 
banks, as they do in the form of deposits within a few 
days after the term day, they are cancelled and the gold 
is returned to London. 

Every week, or every fortnight, according to the cus- 
tom of wage payments, large industrial concerns every- 
where withdraw from the banks coins and bills which 
are payable in coin on demand, for the purpose of pay- 
ing wages. The use of checks or drafts on demand 
upon the banks has been widely extended of recent years ; 
but unless the person to whom the check is given keeps 
his account at the same bank as the drawer of the check, 
the settlement between the banks concerned takes place 
instead of between the drawer of the check and the per- 
son to whom the check is payable. In such a settlement 
there are claims and counter claims which are customarily 
set off against one another in the clearing houses, but 
the balance, whatever it is, is customarily paid in cash by 
the debtor bank to the creditor bank. 

170. Settlement of hank balances. — Thus, no matter 
to what extent instruments of credit are employed to 
facilitate exchange, there are certain large balances 
which must be paid in cash. Such balances between 
banks may be, and customarily are, settled by means 
of the transference of instruments of credit in which the 
holder of funds common to all the banks is concerned 
or in instruments of credit issued by the Government 
in return for previous payments in coin or its equivalent. 

In Canada, "legal tenders" for $1,000 each are cus- 
tomarily used by the banks in this way, fractions of this 
amount being paid by checks on the Bank of Montreal 
against deposits previously made in that institution. In 
London the clearing house balances are settled by checks 
upon the Bank of England, where all bankers who use 



RELATION TO PRICES 173 

the clearing house have accounts. In New York and 
elsewhere the process is similar, the clearing house settle- 
ments being made in actual cash or in some highly ap- 
proved and immediately negotiable instrument of credit. 

171. Gold required for international trade. — The in- 
ternal trade of a country always greatly exceeds its ex- 
ternal trade and therefore the amount of currency which 
is required within the country is always much greater 
than the amount required for the conduct of its export 
or import business. Yet the latter amount in the case 
of each of the great commercial nations is very large. 

In international trade, instruments of credit are used 
largely, but, notwithstanding the economy in circulation 
which the use of these documents implies, there remain 
large balances which cannot be settled otherwise than 
by the transference of gold. When credits in favor of 
the United States and Canada accumulate in the autumn 
after grain shipments have begun, there begins as a rule 
(although not invariably, see page 174) what is known 
as the "autumnal drain" of gold to America from Eu- 
rope. The amount of the gold shipped varies in respect 
to the grain shipments, and also in respect to other 
simultaneous debits and credits, but it is usually a factor 
of considerable moment. 

If we were to suppose that so much as ninety-eight 
per cent of the aggregate amounts involved in all trans- 
actions, domestic and foreign, of the great trading na- 
tions, are settled by the transference of credits through 
the use of credit instruments (and this proportion is 
probably not far from the actual conditions in certain 
of these countries ) , we should still have to suppose that 
two per cent of the enormous total would demand gold 
or silver for settlement. It is clear then that the greater 
the volume of business and the greater the number of 



174 ECONOMICS 

transactions, the larger the amount of gold and silver 
which will be necessary in order to conduct them within 
a given time. 

While it is true that coin is economized to a greater 
extent than ever it was, it is true, also, that capital is 
transferred with greater velocity than ever it was. If, 
for instance, a wholesale trading house turned over its 
capital once a year in a given number of transactions, 
and owing to increased trade at another period turns 
over its capital twice a year in twice the number of 
transactions, it is clear that currency facilities of one 
sort or another will be necessary to an extent at least 
approaching twice the amount formerly necessary. 

172. Money in circulation affects prices through 
cr<?6Z/i.— Notwithstanding the influence of credit, it is 
clear, therefore, that the quantity of the precious metals 
in circulation as money is not a negligible factor. The 
influence upon prices of an increase or a diminution of 
the amount in circulation is, however, neither immediate 
nor direct. The influence is indeed conveyed through 
credit. When the banking reserves are re-enforced by 
receipts of gold, credit expands, and when they are de- 
pleted by withdrawals of gold, credit contracts. The 
expansion of credit induces increase of demand and in- 
crease of demand induces advance of prices, while con- 
traction diminishes demand and induces fall in prices. 
In this indirect way an increase in the quantity of the 
precious metals available for use as money induces an in- 
crease of prices within the area which is affected by the 
expansion of credit and a diminution of that quantity 
has an opposite efl^ect. 

The "autumnal drain" of gold from Europe produces, 
other things being equal, a restriction of credit there 
and the receipt of the gold in America produces, other 



RELATION TO PRICES 175 

things being equal, an expansion of credit on this 
side. 

There are numerous historical examples of the effect 
upon prices of considerable increases in the supply of 
gold. For example, after the new supplies of gold 
from California and Australia in 1849-1851 began to 
reach Europe, credit expanded, and prices rose accord- 
ingly. Similar results were brought about when, after 
1886, the yield from the South African mines was great- 
ly increased, owing to improvements in the process of 
reducing the ore, and new gold in great quantities began 
to pour into Europe. The resei'ves of the European 
banks were substantially increased, especially those of 
the Bank of France and the Bank of England. 

The accumulation of banking reserves caused the rate 
of interest to fall, industry was thus stimulated and the 
"long depression" which had lasted from 1876 passed 
away. The stimulus to industry through the fall in the 
rate of interest which was the consequence of the in- 
creased supplies of gold and the replenishment of the 
banking reserves which these new supplies provided, led 
to increased demand for which the increased credits af- 
forded effective resources. Prices rose sharply from 
the low points to which they had fallen during the "long 
depression." It should be observed that only those 
prices which applied to goods the demand for which was 
increased by the relaxation of credit, were, strictly speak- 
ing, advanced in consequence of that relaxation which, 
in turn, was due to the increase of the gold reserves. 

173. The panic of 1907. — The process of the replen- 
ishment of European currency by large new supplies of 
gold was arrested by the outbreak of the South African 
war. For three years the mines produced nothing. 
When operations were resumed the stream of gold con- 



176 ECONOMICS 

tinued. New sources of demand had meanwhile devel- 
oped. Russia, Austria and Italy had already begun to 
rehabilitate their public credit by the increase of gold 
reserves against their fiduciary currency. Their im- 
portations of gold, arrested by the South African war, 
were now resumed to a greater extent than formerly. 
Exportation of goods was encouraged and importation 
checked by heavy duties. Immense exportation of wheat 
enabled Russia not only to rehabilitate wholly her de- 
preciated ruble, but enabled her to accumulate an enor- 
mously greater stock of gold than was necessary for that 
purpose. The United States Government also adopted 
the policy of storing gold. 

In consequence of these large operations, notwith- 
standing the greatly increased production, a scarcity of 
gold in relation to the currency requirements of a greatly 
increased volume of trade began to appear within the 
range of probability. 

Then, as nearly always under similar conditions, the 
hoarding of gold became a considerable factor. Such 
hoarding always goes on especially in Mohammedan 
countries; and, when those comitries enjoy prosperity in 
trade, and when it appears that gold is difficult to get, 
scarcity is regarded as imminent, goods are sold and 
gold is secreted, only to be brought out again when 
prices have fallen further and purchases may be made 
with advantage. Hoarding thus went on sharply in 
India and Egypt. Public and private hoarding, to- 
gether with the increasing demands of credit for com- 
mercial and for speculative purposes, thus led to the 
crisis of 1907, which was partly a credit and partly a 
currency crisis. 

174. Fiduciary currency. — The term fiduciary cur- 
rency is applied to currency whose acceptance as money 



RELATION TO PRICES 177 

depends not upon the material of which it is made but 
upon the credit of the issuer — in other words, upon be- 
Hef in the reHabihty of the promise to pay at a certain 
place on demand or at a certain date a specific amount in 
a certain currency material or its equivalent. The brass 
tokens which the Hudson Bay Company issued were 
redeemable by the company in goods equivalent to one- 
quarter, one-half or one whole standard beaver skin. 
These brass tokens were fiduciary currency because their 
acceptability was determined by the faith that the com- 
pany would keep its engagements. 

At the present moment Chinese barbers issue small 
bamboo sticks which entitle the bearer to their services. 
These sticks are sold and used because the single service 
of a barber is valued at a rate lower than the smallest 
coin in circulation — the "cash" — represents. Several of 
the sticks are sold for one "cash." There is here also an 
element of trust in the good faith of the barber. 

175. Paper money. — Fiduciary currency, usually, al- 
though not invariably, consists of a document of paper 
or parchment upon which is written or printed the prom- 
ise to pay. Such notes or bills have been employed 
since very early times. Ancient Chinese notes or bills 
of this kind are still extant. 

It is clear that the reliability of the issuer of such docu- 
ments must be subjected to repeated tests. So long as 
the tests are satisfactorily passed, the credit instruments 
will continue to circulate at their face value. If doubt 
is cast upon the reliability of the issuer, his issues may 
still pass current ; but they will do so at a discount. If 
fresh issues are made while the issuer is still in default 
in respect to previous issues, the discount increases and 
eventually the issues become non-negotiable on any 
terms. 

C— I— 12 



178 ECONOMICS 

176. An hyijothetical case. — If we suppose a country 
to be a closed economic system, that is, a system which 
has no contact with the external world, the issue of Gov- 
ernment notes in such a country without any power of 
redemption would be possible provided the people had 
confidence in the stability of the Government. If, how- 
ever, they feared the displacement of the Government 
and the repudiation by its successor of the obligations 
it incurred, the irredeemable paper of the Government 
would not be accepted even by its own subjects, and the 
Government would be unable to issue a forced loan in 
the form of irredeemable Government notes. If, how- 
ever, confidence in the Government was such that the 
people supported a policy of this kind, and accepted 
Government paper instead of cash while the Government 
justified itself on the ground of national exigency, the 
paper would pass into circulation, but for domestic pur- 
poses only. 

In such a case where such a policy is adopted there 
cannot be any doubt about the reactions which will 
take place. History affords numerous examples (no- 
tably the situation in the United States during the 
Civil War when forced currency was put in circulation 
as a desperate financial expedient) . There would speed- 
ily develop in the market two prices — one price for 
payment in cash and the other and higher price for pay- 
ment in Government paper. 

Gradually cash would disappear. It would be 
hoarded because of its increased and probably increas- 
ing value (on the terms of the hypothesis it would re- 
main in the country, but if the circle were not closed it 
would for the most part leave it) and paper alone would 
remain in circulation. It would be necessary to increase 
the issue of paper because of the disappearance of the 



RELATION TO PRICES 179 

cash which had formerly been current and because the 
increase in paper prices caused an increased demand for 
the paper for purposes of interchange. Such paper 
could easily be printed and issued and the phenomenon 
of overissue would be manifest. 

The rapid rise of paper prices would disturb all exist- 
ing contracts, people with fixed incomes would be re- 
duced to poverty and unless wages were advanced 
immediately upon every advance in the prices of the 
necessaries of life, industry would be dislocated, and the 
whole economic system thrown out of gear. Return to 
a condition of equilibrium would be slow, and would in- 
volve great sacrifices. The foundation of many great 
American fortunes was laid in the period of reconstruc- 
tion after the war, but the personal sacrifices of the mass 
of the people were tremendous. 

177. Fiduciary currency in international trade. — If, 
instead of a closed economic system, we suppose one 
which forms a part of the system of international ex- 
change, we shall see at once that an irredeemable Gov- 
ernment currency is impossible, and that since inter- 
national balances must be settled in international money 
— in a commodity which is universally acceptable — it is 
necessary to maintain such a reserve of gold as will 
suffice to meet these international balances. 

It may, however, be objected that international trade 
involves both imports and exports and that it is therefore 
merely barter. If imports and exports over a short 
period, say three months or six months, coincided precise- 
ly or even nearly, such would be the case; but they do 
not. Moreover, there is a constant movement of capital 
from one country to another, notably from Europe to 
America and from America to Europe. Every day on 
the Bourses and Stock Exchanges of Europe and the 



180 ECONOMICS 

United States, American securities are bought and 
sold. The payments for these securities have to be made. 

For several years after the Civil War the United 
States borrowed heavily from Europe, these loans being 
transferred partly in goods and partly in gold. The 
funds so derived were expended in railways and in in- 
dustrial enterprises. The accimiulation of capital in the 
United States, especially during the period between 
1890 and 1910, led to the repayment of some of these 
loans through the purchase of American securities in 
London and elsewhere. Meanwhile, however, owing to 
the development of American industries, large further 
obligations were incurred in Europe between 1900 and 
1906. These obligations were intended to be of a tem- 
porary character, so great was the optimism of the time. 
The funds from these new loans were invested in highly 
permanent forms — in industrial enterprises and the like. 
The immense efforts to repay these obligations within 
the stipulated period were aided to a certain extent by 
the expansion of industry and by the accumulation of 
capital during the later part of the period (in 1905 and 
1906) ; but the strain was too great, and from this and 
other causes, as already explained, arose the currency 
crisis of 1907 — a crisis which may in general be said to 
have been caused by concentrated strain upon an un- 
concentrated system. 

178. Mo'iiey and credit combined influence prices. — 
It is thus very clear that the influence of the movements 
of credit and the influence of the movements of gold 
must be taken together. The greater the volume of 
credits necessitated by the greater volume of business, 
the greater the volume of gold which is necessary to sus- 
tain these credits. If the required volume of gold is, for 
any reason, not forthcoming, the credit system must 



RELATION TO PRICES 181 

automatically contract. This automatic contraction is 
one of the causes of credit crises. 

While it is true that by far the greater volume of 
the amounts involved in the interchange of commodities 
is transferred from the purchasers to the sellers of goods 
by the means of instruments of credit, it is nevertheless 
true that these instruments of credit would be valueless 
were it not for the fact that on demand or at a certain 
stated period they can be in turn exchanged for gold 
or silver. So long as confidence exists that this ex- 
change can be effected, the instruments of credit may 
remain current, but the moment a breath of suspicion 
arises that the debtor, whether he is a banker or a mer- 
chant, is not in a position to meet his obligations, it be- 
comes impossible for him to issue any more instruments 
of credit. Those which he has already issued come to 
be presented at maturity and as he cannot replace them 
by others, he must meet them in hard cash. 

179. Bank reserves. — The amount of hard cash which 
is available for meeting credit obligations is thus not only 
not a matter of indifference ; it is a matter of the highest 
importance. A banker, for example, who lends his cap- 
ital and the funds with which he is entrusted by others, 
must preserve a certain proportion in which three ele- 
ments are concerned. He may lend some of his money 
on relatively long dated securities, he may lend some 
of it on short dated securities or on call and he must keep 
a certain proportion of it in his safe. If he should not 
maintain a reserve in his vaults, his credit would disap- 
pear, because he might be unable to meet a legitimate 
claim for some of the funds entrusted to his keeping. 

Reserves are thus necessary in the case of the individ- 
ual banker and therefore of all bankers. In the United 
States and in Canada bankers customarily keep a portion 



182 ECONOMICS 

of tlicir reserves in coin — gold and silver — and a portion 
in "legal tenders" or notes of the Government. 

If the bankers are obliged to hold "legal tenders" and 
if the Government does not retain against these instru- 
ments of credit an equivalent amount of coin, the "legal 
tenders" are not in any legitimate sense a reserve, they 
are really a forced loan to the Government. The "legal 
tenders" can be considered as a reserve only if they are 
instantly exchangeable for coin or bullion. 

If, then, the banker does not hold all his reserve in 
coin, the Government must hold in coin that portion of 
his reserves which is represented by "legal tender," other- 
wise the Government imperils the solvency of the banker, 
for there can be no compulsion upon his creditors to ac- 
cept the "legal tenders" in lieu of cash unless the creditors 
can convert them into coin should they wish to do so. 
The creditors of the banker may be in Europe where 
"legal tenders" of the United States or of the Canadian 
Governments are simply looked upon as a means of ob- 
taining gold. If they do not answer to this description 
they are valueless there. 

While there cannot be held to be a direct relation be- 
tween the quantity of gold in circulation and the range 
of prices of consumable commodities, there is, neverthe- 
less, through credit an indirect relation. The smooth 
working of the intricate mechanism of international 
credit depends upon the instant availability of sufficient 
gold to meet any legal demand upon those who have the 
duty of settling balances. If, for any reason, such a de- 
mand cannot be met, friction is developed which must 
be more or less disturbing to the whole fabric of credit. 
]\Iany remote causes may have contributed to produce 
the situation which led to inability to meet the demand, 
but it is the inability to do so which brings to light the 



RELATION TO PRICES 18S 

fact of the organic relation of the affairs of the defaulter 
to the general system of credit. If the defaulter is im- 
portant, widespread doubts are cast upon the solvency 
of others. When Overend Gurney & Company failed 
and when Baring Brothers placed their affairs in the 
hands of the Bank of England, great shocks were given 
to credit. The beginning of the credit and currency 
crisis of 1907 was indicated by a few significant failures. 
Such failures did not cause the crisis. They were merely 
incidents in it. 

180. Importance of elastic cicrrency system. — No sys- 
tem of currency or banking is proof against all possible 
crises, but a crisis may be precipitated or the conse- 
quences of a crisis may be made more injurious or more 
enduring by defects in such systems. The maintenance 
of sufficient reserves and the automatic expansion and 
contraction of credit are the most certain means of avoid- 
ing acute crises and of mitigating their effects when they 
occur. 

It is possible, however, to go to excess even in gold re- 
serves. The reserves may be of such a character that 
gold deposited in them does not enter into or remain in 
circulation. When gold is hoarded by private indi- 
viduals, it passes out of circulation during the period of 
hoarding. The Governments may hoard gold with the 
same effect as private individuals. The war hoard of, 
the German Government, which it keeps in the fortress 
of Spandau,*is not of great magnitude, but it is with- 
drawn from circulation so long as it remains there. No 
fiduciary circulation is issued against it and it does not 
act as a reserve for any but a military crisis. 

The prosperity of Egypt and India have given the 
Mohammedans in these countries increasing resources, 
and as is their habit when they accumulate wealth, they 



184 ECONOMICS 

have hoarded gold. This hoarding has resulted in the 
diversion to Egypt and India of a large proportion of 
the annual production and consequently to a diminution 
of the amount of gold which it was expected would reach 
Europe, and would there be employed as the basis of 
general international credits. Fears of political disturb- 
ance and of war both in the near and in the far East have, 
from time to time, further induced hoarding throughout 
these regions. Meanwhile the demand for gold for in- 
ternational currency purposes has increased with the in- 
crease of trade. 

A relatively high level of international prices indicates 
either abundance of gold or expansion of credit. If it is 
due to the former condition, it is likely to be permanent ; 
if it is due to the latter condition, it is bound to be tem- 
porary. In so far as the expansion of credit has been 
due to the supposititious availability of gold for currenc}^ 
purposes when such availability does not exist, the ex- 
pansion of credit must be as temporary as if it were not 
based on any supposition of that kind. In so far as the 
hoarding of gold has withdrawn the metal from reserves 
available as the foundation of credit, such hoarding con- 
tributes to the weakening of credit and therefore to the 
fall of prices. 



CHAPTER VIII 

EFFECT OF LEGISLATION ON PRICES 

181. Changes in monetary laws. — Since the quan- 
tities of the precious metals available for use as money 
influence prices, the operation of monetary laws may, 
through affecting the quantities so available, contribute 
to a rise or fall of prices. If, for instance, silver is large- 
ly used in a country for purposes of exchange and the 
Government passes a law which removes silver from the 
category of legal tender currency, there will tend to be 
a rise in all prices stated in silver and a fall in all prices 
stated in gold. This condition actually occurred in 1876 
after Germany had "demonetized" silver, and when the 
Latin Union (France, Belgium, Switzerland and Italy) 
had restricted their silver coinage. The effect of a law 
which would attempt to force upon a country an irre- 
deemable paper currency has already been noticed. 

While direct attempts on the part of Governments 
to influence the course of prices through monetary laws 
have generally been defeated by unforeseen reactions, all 
monetary laws influence prices more or less definitely. 
Laws on banking may, for example, by restricting or 
extending the kinds of security upon which a banker 
may lend money, influence prices by enabling the bor- 
rower to refrain from selling at a moment when by throw- 
ing his goods upon the market (a course which in the 
absence of accommodation he might have to adopt) the 
price might be depressed. 

182. Duties. — The influence of an excise duty upon 

185 



186 ECONOMICS 

the price of a commodity is in general to increase the 
price by the amount of the excise duty. Thus, for ex- 
ample, in the United States denatured alcohol, or alcohol 
which has been rendered noxious to the taste in order to 
prevent its consumption as an article of drink, is sold to 
scientific institutions for scientific purposes at a certain 
net wholesale price per gallon, no excise duty being 
charged by the Government. In Canada, on the other 
hand, the Government levies an excise duty upon this 
commodity no matter for what purpose or by whom it is 
intended to be used. The price, therefore, to scientific 
institutions in Canada is the net price of the alcohol plus 
the duty, making the price of precisely the same com- 
modity in Canada five times the price in the United 
States. 

Excise duties on commodities manufactured in a coun- 
try are of course always supported by customs duties 
levied on the frontier. In the case of all commodities 
which are subject to excise duties, under normal condi- 
tions of trade, the consumer must pay all of the duty — 
customs or excise. 

The case in respect to customs duties, other than those 
levied to support excise, is somewhat different. The 
following is the general principle upon which it may be 
determined in any particular case to what extent, if any, 
the customs duty is included in the price paid by the final 
consumer. It must be observed, however, that the prin- 
ciple is extremely difficult to apply because of the diffi- 
culty of following step by step the transactions by means 
of which any given commodity passes from the exporter 
in one country to the consumer in another. In some 
instances it is possible to follow with care the series of 
transactions, but the risk of error is considerable. 

It need scarcely be pointed out that statements to the 



EFFECTS OF LEGISLATION ON PRICES 187 

effect that customs duties are alwaj'-s included in the 
price paid by the consumer or that such duties are never 
included are equally vakieiess; in general, statements 
about the matter in a particular case are based upon im- 
pressions and not upon evidence. The principle upon 
which the evidence may be collected is as follows : 

183. Who pays the tax? How to test, — Let us sup- 
pose, in the first instance, an atmosphere of perfect com- 
petition in which sellers compete with one another so 
strenuously that all of them are selling at the marginal 
profit — that is, at the profit below v/hich none could sell 
and remain in business. Under conditions of that kind 
a tax upon the commodities which were sold would neces- 
sarily fall upon the buyers of the commodity. If these 
buyers bought to sell again and if they also were work- 
ing upon a marginal profit, a tax upon the commodity 
would necessarily be passed on by them to the consumer. 
The price being the lowest possible (under the condi- 
tions, indeed, he would himself have the larger share in 
determining it), the consumer would be able to pay 
the tax and would have to pay it or go without the 
goods. 

Let us suppose an exactly contrary case. In this case 
the atmosphere is not one of competition, but is one of 
monopoly. The manufacturer and seller of the goods 
in question has been able to monopolize the sale of the 
goods and has used his power to the extent that he ob- 
tains for the goods the highest price which the consumer 
can pay and live. If now a tax is placed upon such 
goods, it is obvious that the consumer cannot pay be- 
cause he is, so to say, at his last gasp. He can pay no 
more for the goods than he has been paying. If the 
price rises, he cannot buy. The monopohst manufac- 
turer can sell only if he pays the duty himself, that is, 



188 ECONOMICS 

if he continues to sell the goods at the price which he 
obtained previous to the imposition of the duty. 

If, however, the customs duty on the commodity he 
manufactures is increased vmtil it absorbs the whole of 
the profit, which the manufacturer makes in excess of 
what he could make in some other business, he will stop 
exportation and divert his capital. 

If this were universal the tax would yield no revenue, 
the consumers would not consume and the foreign pro- 
ducer would not produce. The Island of Sumatra pos- 
sesses a monopoly of the supply of a certain kind of 
pepper, the policy of the Dutch East India Government 
having been to concentrate the cultivation of particular 
spices in particular islands. For that reason, although 
Sumatra pepper competes. with peppers of other vari- 
eties, those who prefer it, provided they are numerous 
enough to influence the market importantly, would 
have to j^ay the Sumatra price for it, which would, under 
the conditions, be higher than that of other peppers. If 
a new import duty were imposed or an existing duty 
increased upon Sumatra pepper alone, a portion of this 
advantage in price, although perhaps not the whole of it, 
would have to be foregone by the Sumatra producer — 
that is, he would have to pay the duty in the form of 
diminished price. If, however, the Sumatra pepper en- 
joyed no advantage in price, the monopoly notwithstand- 
ing, because it had to compete with other peppers of like 
quality, and if the duty were indiscriminately imposed 
upon all peppers, since the price would thus be arrived 
at by competition, the bulk of the duty would probably 
fall upon the consumer ; only a small portion of it, if any, 
would fall upon the pepper growers. 

Such extreme cases are rare, but all cases come be- 
tween the two extremes. According as the element of 



EFFECTS OF LEGISLATION ON PRICES 189 

competition or monopoly is dominant at each stage of 
the process of manufacture, transport and sale, the tax 
will be paid by one or other party to the transaction. In 
general, the incidence of the tax is determined by an 
explicit or an implied compromise. The tax may be par- 
tially paid by the consumer and partially by each one of 
the numerous persons through whose hands the com- 
modity had passed, including the manufacturer. Such 
is the general principle upon which the incidence of cus- 
toms duties may be determined in particular cases. 

In estimating the effect of tariffs upon prices, much 
importance must be attached to the question of quality — ■ 
the prices of unlike commodities ought not to be com- 
pared with one another — and importance should also be 
placed upon the condition of the market at the time the 
duty is imposed or a comparison instituted. A stable 
market in which a customary price has thoroughly estab- 
lished itself is very difficult to move either up or down 
by the increase or diminution of a tariff. On the other 
hand, a sensitive market will anticipate tariff changes, 
even sometimes erroneously. 

184. Speculation and prices. — Speculation on an im- 
portant scale is most observable in the highly organized 
markets (as in the cotton, wheat, iron, copper, silver 
markets ) , but it may be held as existing in all markets 
and in connection with all commodities. The essence of 
speculation is the purchase or sale of commodities not 
immediately required, or the refraining from purchas- 
ing or selling commodities the sale or purchase of which 
is not immediately indispensable. 

In fact, all buying and selling which is not merely 
from hand to mouth is, in the strict sense, speculative 
buying and selling. The farmer who refrains from sell- 
ing his wheat because he thinks that an advance in the 



190 ECONOMICS 

market is likely to occur, speculates in wheat in the same 
way that a miller, who buys weeks in advance wheat de- 
liverable in September, speculates in wheat. A line may, 
however, perhaps be drawn between the genuine dealer 
in wheat, like the farmer and the miller, and the groups 
of persons whose business consists exclusively in buying 
and selling wheat which they have no intention of ever 
either receiving or delivering. 

It may be observed, however, that the presence of such 
groups in the wheat market — groups, that is, who will 
always buy and always sell at a price — has contributed 
importantly toward the organization of the wheat trade. 
Wheat not only is in universal demand because a large 
proportion of the human race use it as a staple food, but 
it is immediately salable because, whether there is a de- 
mand for consumption at a particular moment or not, 
people can be found who are willing to speculate upon 
the future demand and to purchase immediately. 

185. Cornering. — It is true that speculators attempt 
sometimes to control the supply by "cornering." This 
operation can be successfully perfonned only when ow- 
ing to coincident increase of demand and restriction of 
supply the surplus of wheat over the quantity necessary 
for consumption is relatively small. A speculator with 
extensive credit may under such conditions secure for a 
time a certain position in the market, which may enable 
him to dictate terms to other speculators who are dealing 
in this surplus. Thus, the market quotations may for 
some days exhibit violent fluctuations, these fluctuations 
being due to the manipulations of speculators. 

The great mass of transactions in wheat, however, 
which are conducted in advance of receipts and deliveries, 
are not as a rule touched by the speculative flurries. 
Yet, when speculation in the wide sense is considered, 



EFFECTS OF LEGISLATION ON PRICES 191 

there can be no doubt that market prices are influenced 
by the circumstance that sometimes the farmer withholds 
his wheat from sale and sometimes the miller buys great- 
ly in excess of his immediate requirements. The 1913 
Bank Act of the Dominion of Canada contains a clause 
which entitles chartered banks to lend to farmers on the 
security of their wheat, the object being to enable the 
farmer to hold his crop for an advance in price should 
he desire to do so. It is the practice among millers 
when buying wheat for manufacture into flour to sell 
futures at the market price at the time of purchase in 
order to protect themselves against a fall in the market 
when the flour is ready for it. This is known as "hedg- 
ing." 

When the population of Western Europe and of the 
United States was increasing rapidly in the latter part 
of the eighteenth century, and the beginning of the 
nineteenth, and when prices of foodstuffs were in conse- 
quence advancing rapidly, attempts to "corner" the 
market became very frequent and, owing to the accumu- 
lation of capital, some of them were more or less suc- 
cessful. Old laws were put in force against the prac- 
tice of "cornering," but an even more effective check 
upon it was imposed by the formidable "meal" and 
"bread" riots in which the granaries of the merchants 
were plundered and the contents distributed, the prin- 
cipal inhabitants of the towns sometimes taking part in 
these riots. The chief protection against "corners" in 
the great staples must, however, lie in the increasing 
magnitude of the operations which would be necessary 
in order to manipulate a corner. It may be repeated that 
a "corner" can only be successful when the surplus is 
small. It is true that that moment is the time when a 
"corner" is most likely to cause distress by the restric- 



192 ECONOMICS 

tion of competitive selling in an abnormally high mar- 
ket. 

186. Regulation of price fluctuations. — From the dis- 
cussion of the complicated series of influences affecting 
movements of prices in this and preceding chapters, it 
is obvious that the elimination even of an important 
member of the group together with its reactions upon 
the others would not altogether obviate fluctuations, 
although such elimination might diminish the range and 
frequency of fluctuations. For instance, if the whole 
of the influence of currency movements upon prices 
were eliminated (to put the case so extremely that the 
condition would be impossible), there would still re- 
main numerous other influences upon supply and de- 
mand which would cause both of these to fluctuate, and 
which would therefore cause variations in the relative 
value of commodities, however these values might be 
estimated. Nevertheless, the fluctuations of prices, 
which are directly or indirectly due to currency move- 
ments, are so important that regulation of these move- 
ments may be expedient in so far as such regulation is 
compatible with the economic laws which determine the 
movements of goods and of money as well as to a large 
extent the migration of people. If government regula- 
tion conflicts with these laws, it must fail. Earthquakes 
and floods may be taken into account and their effects 
sometimes minimized by appropriate precautions, but 
legislation against them is futile. Economic movements 
on a large scale, however little we may know about 
them, may be regarded as scarcely less invincible than 
other movements of nature. 

187. Cost of living. — The question of the cost of 
living is discussed under the head of consumption, but 
here it may be observed that the movements of prices 



EFFECTS OF LEGISLATION ON PRICES 193 

are not uniform nor are they coincident. The causes 
of price fluctuations are so numerous that no uniformity 
is possible. There thus arise great disparities. Peo- 
ple who have one commodity to sell find that the price 
has fallen, while in the same period the prices of the 
commodities they desire to buy have risen. When 
movements and prices are active these disparities are 
most numerous, and the disturbance of economic re- 
lations which they produce most pronounced. 

If advances in prices were general, and if advances in 
wages, salaries and other means of income corresj)onded 
closely and immediately to such general advances in 
prices, there would be no question of the increased cost 
of living under the standard of comfort prevailing. 
Such a course of events does not happen, however. 
Wages must in general advance, but they do not do so 
immediately, and they may fall when the prices of the 
necessaries of life fall, but they do not do so immedi- 
ately. In short, the curve of wages rises more slowly 
and falls more slowly than the curve of the prices of 
the necessaries of life. Wages are not necessarily 
affected by the prices of commodities other than the 
necessarienS, although statements of the movements of 
prices include in general both categories of commodities. 
These points will be more fully dealt with in connection 
with wages and with the consumption of the working 
population. 

188. Trade cycles. — While it is tiiie that depression 
and inflation of trade are "states of mind," it is also true 
that these states of mind are induced by certain objec- 
tive conditions. These conditions appear to recur with 
an approach toward regularity in their frequency. 
Thus, a period when demand is fully up to if not 
slightly in excess of supply, when industry is fully oc- 
c— I— 13 



194 ECONOMICS 

cupied, when prices are advancing and profits are in- 
creasing, is by general consent regarded as a period of 
brisk trade. When demand is greatly in excess of sup- 
ply and when prices rise sharply, an increase of pro- 
duction follows, and when this production is increased 
to such an extent that it meets the demand and seems 
likely to be pushed beyond it, such a period is by gen- 
eral consent regarded as one of inflation. When sup- 
ply is greatly in excess of demand, when prices fall, 
when profits decline, when production is reduced, when 
employment diminishes and credit shrinks, such a period 
is by general consent regarded as one of depression of 
trade. Clearly all of these conditions are relative to 
some preceding condition. Trade is brisker or is more 
depressed in relation to some antecedent state of trade 
in which it was not quite so brisk or in which it was not 
quite so depressed. 

Efforts have been made from time to time to detect 
a more or less regular periodicity in these fluctuations, 
and for nearly a century the economic history of the 
commercial nations seemed to exhibit trade cycles, each 
cycle including a period of normal trade, one of inflated 
trade and one of depressed trade, which appeared ap- 
proximately every eleven years. These cycles were 
found to be more or less nearly related to a similar 
periodicity of harvests, and this periodicity of harvests 
— normal, abundant and deficient — appeared to be co- 
incident with certain changes in the solar envelope by 
which so-called spots in the sun exhibited periodically 
certain changes in form. 

The uniformity of the coincidence of commercial 
crises and solar phenomenon has, however, not been 
maintained of late years. There may be several reasons 
for this. In former times the state of general trade 



EFFECTS OF LEGISLATION ON PRICES 195 

may have had a closer relation to harvests than it has at 
the present time, or the extension of the area in which 
a surplus of foodstuffs is produced may have resulted 
in more uniform total supply. A deficient harvest in one 
country does not necessarily mean a deficient harvest 
in all of the many grain-producing countries, and the im- 
proved means of transportation and of storage of grain 
have brought within the commercial network practi- 
cally all of the grain-producing regions. 

The hypothesis, on the other hand, may be unsound. 
The occurrence of spots on the sun may not be related 
as a cause either to harvests or commercial crises. It 
is obvious that even a century is too short a period to 
afford observations of a sufficiently extended character 
to justify other than provisional conclusions upon the 
question.^ 

' See Professor Stanley Jevons' revival of his father's theory. Contemporary 
Review, May, 1909, and Professor Chapman's review in Economic Journal, 
October, 1909. 



PART III: DISTRIBUTION 

CHAPTER I 
PROBLEMS OF DISTRIBUTION 

189. Significance of distrihution. — Distribution in the 
economic sense of the word means the process by which 
those who contribute to production obtain their shares 
of that which is produced or of its value in the market. 
In discussing- this question, as in discussing all eco- 
nomic questions of a like character, we are concerned, 
as students of economics, not with what ought to be 
the division of the result of production, but with the 
scheme of division as it actually exists. If we desire to 
examine critically any project for the alteration of the 
existing- economic system it is advisable that we should 
understand, fii'st of all, how the existing system works. 
It is expedient to do this even if we may determine to 
pass from the field of economics proper into the field 
of ethics or into that of politics in which ideal social 
systems may appropriately be discussed in their ethical 
and political aspects. 

Our present business, then, is to learn in what manner 
distribution takes place under the influence of the exist- 
ing economic system, imperfect as it may be. In the 
study of distribution, as in the study of production, we 
must have regard not only to series of cases of distribu- 
tion in individual economic groups but also to the dis- 
tribution of what has been called the national aggregate 
product. This has also been called the rent interest 

197 



198 ECONOMICS 

earnings fwnd or the national dividend. It is, however, 
difficult to avoid ambiguity in phrases of this kind. The 
aggregate cannot be regarded as constituting at any 
particular moment a determinate fund in the common 
sense of the word. 

The product of a simple productive operation exer- 
cised upon raw material which is the "gift of nature" 
to which no one lays any claim of ownership, may be the 
result of the labor of one person or of many. If the de- 
sign and the labor are wholly due to the activities of one 
person there can be no question as to the right of that 
person to the enjoyment of the whole of the product of 
his labor, in a community which recognizes any right 
of private property. If, however, the product is the 
result of the activities of several persons v/orking upon 
it together or successively, the respective rights of the 
several producers may be subject to dispute. If the 
product is of such a nature that joint labor is indispen- 
sable, it may be very difficult, in the absence of any 
recognized custom, to determine the respective rights, 
and it may be quite impossible to determine them upon 
any principle of ideal justice. 

Primitive people whose surplus is usually very small 
and who under the best conditions are engaged in a 
more or less unremitting struggle with nature, have, as 
a rule, a keen sense of fairness in the mass, as well as a 
lively aptitude for securing their own interests. There 
thus arises in such communities a habit of balancing the 
bearings of disputed questions of labor and of owner- 
ship. Russian and Chinese peasants are conspicuous 
for the length and minuteness of such discussions. The 
writer on one occasion listened from ten in the morning 
until five in the afternoon to a group of Russian peasants 
discussing in great detail and with much power of analy- 



PROBLEMS OF DISTRIBUTION 199 

sis an economic question of importance in their village 
life; and in China, on more than one occasion, he has 
been kept awake by Chinese people discussing their busi- 
ness affairs with much eagerness in the street in the 
middle of the night. 

190. Difficulty of establishing an ideal system. — 
Sometimes the question is insoluble and appeal is made 
to an external arbitrator; but more usually the dispu- 
tants settle these questions among themselves on terms 
which satisfy everybody, or perhaps sometimes satisfy 
nobody. In the province of Archangel in Russia, for 
example, the division of land of varying qualities among 
peasants in such a way that each peasant has not an 
equal amount of land, but areas of land of equal pro- 
ductivity under normal cultivation, is conducted by the 
peasants themselves with marvellous skill, and without 
surveying instruments, and with general acceptance. 

Apart from questions which may arise between the 
actual workers upon the simplest productive operation 
which involves joint action, there is the question of the 
social indebtedness of the worker. Not only is he in- 
debted to the organization of his tribe or community 
for the opportunity to practise his art in peace, whatever 
his art may be, but he may be indebted for the design 
which he uses to a long succession of primitive craftsmen 
of his own or of other tribes or even of other races. In 
any strict distribution of the credit of production, these 
earlier workers would also have to be considered. 

The demands of justice may be regarded as going 
much farther than the mere labor of the moment. Even 
in simple production individual labor is a contradiction 
in terms ; all labor is social. The labor of to-day could 
not be what it is but for the labor of countless artificers 
of the remote past. 



200 ECONOMICS 

In complex production, where many persons are in- 
volved — some in the primary exploitation of the raw 
material, some in its transportation, somiC in the manu- 
facture of tools for its exploitation, transportation and 
manufacture, others in the subsequent manufacture, 
others in the sale and perhaps many others who con- 
tribute the means of life to the workers while the long 
continued productive processes are going on — there are 
almost infinite possibilities of dispute as to the respective 
shares to which each member of these numerous groups 
is entitled. It is obvious that in long production proc- 
esses, every member of the various groups cannot wait 
until the total utility of the product can be realized even 
by exchange. Obviously none of them could wait until, in 
the course of a long process of consumption lasting per- 
haps through centuries, the utility of the product could 
be completely exhausted. Some method of distribution 
therefore must exist by means of which the utility which 
is contributed by each contributor may be estimated, 
and the contributor compensated for that utility or use- 
ful service as it is valued at the time when the service is 
rendered — apart altogether from the eventual value of 
that utility or of the total of utility to which it con- 
tributed. Such a method emerged in course of time and 
its characteristics are those of the present economic 
system. 

191. The present system. — Thus each member of the 
group makes his contribution to the productive process, 
receives the return to which he is regarded as entitled, 
gives his quittance, and passes into the unknown, while 
the product of the joint exercise of his functions con- 
tinues to yield its utilities perhaps for many generations 
of consimiers. The process on the face of it seems 
simple. It might be regarded as a perfect system if 



PROBLEMS OF DISTRIBUTION 201 

each member of the group were concerned exclusively 
with securing the interests of the group as a whole, re- 
gardless of his own interests whenever these conflicted 
with those of the group. Under such a system there 
would not necessarily be equality of possessions, for if 
every contributor were rewarded according to his con- 
tribution as estimated by some economic Aristides, there 
might be inequalities because all might not have equal 
skill, equal physical force or equally continuous health. 
This inequality would result even if there were no in- 
heritance of property, and even if the means of produc- 
tion — land and capital — were possessed and adminis- 
tered by the group as a whole or by representatives of 
the group in the interests of the whole. 

192. Economic equality. — Assuming, for the mo- 
ment, that economic equality is a desirable social end, it 
is clear that while the working of the social system as 
above described might make toward that end, it could 
not necessarily secure it ; because if there were inequality 
of skill, for example, such inequality would reappear in 
the result of any method of distribution which was based 
upon an estimation of the value of the services rendered 
or upon the estimated value of the product. 

The only system as yet projected which aims at 
economic equality is the system of communism. In this 
system, the factors of contribution to production are ir- 
relevant. Everyone who can produce is expected to do 
so to the extent of his power; his needs are met from 
the common stock without reference to the quantity, the 
character or the value of his individual service or prod- 
uct. Such a system may be organized and maintained 
by mutual agreement or by force. Experience has 
shown, however, that it is very difficult to maintain, 
partly because of the variability of the human disposi- 



202 ECONOMICS 

tion and partly because the pitch of emotion, which the 
voluntary adoption of the system involves, is difficult to 
sustain. In cases where communism is imposed by com- 
pulsion, the desire for freedom sometimes becomes dom- 
inant and the system is compromised or even destroyed 
by flights or by revolt. 

The most interesting and extensive communistic group 
of this kind at present in existence, is the group of 
Doukhobortsi or Spirit Wrestlers ( a Russian dissenting 
sect), about 7,000 of whom form a strictly communist 
group residing partly in Saskatchewan and partly in 
British Columbia. Their existing communism is due 
partly to deliberate agreement among themselves and 
partly to the moral force and social pressure exercised 
by their leader. The communal character of their econ- 
omy has not been invariable; it has been marked by 
many fluctuations. About 2,000 have abandoned the 
practice of communism and live chiefly in Saskatchewan 
in the same individualistic manner as the population 
round about them. 

193. Analysis of distributive process. — We may now 
proceed to analyze the process of distribution in relation 
to the process of production which we have already ex- 
amined. We have found that apart from the indispen- 
sable and contingent requisites of production, the fac- 
tors of production are land, labor and capital. The 
expression land is held to include all raw materials ex- 
tracted from nature and also natural agents such as 
water power. Labor includes manual, superintending 
labor and directive labor. Capital includes fixed capital 
in the form of buildings, machinery and like equipment, 
and circulating capital in the form of funds which are 
expended in periodical payments of wages and other 
current expenses and which in normal cases are returned 



PROBLEMS OF DISTRIBUTION 203 

whenever the product is exchanged for money, the funds 
being" again available for similar purposes. 

The land and the capital may belong to one individual 
and the labor may be exercised by the same individual. 
In such a case the division of the value of the product 
would be subject only to curious interest; it could have 
no practical bearing. When, however, the land belongs 
to one person or to many, the capital to another group 
and when the labor is exercised by still another, main- 
tenance of all of these persons and the continuance of 
the exercise of their functions come to be matters of 
supreme importance, because the continuity of the pro- 
ductive process depends upon them. 

In Western Europe throughout the middle ages, and 
in Eastern Europe until the middle of the nineteenth 
century, it was almost universally believed that to leave 
the determination of the rent of land, the rate of interest 
and the rates of wages to unrestricted competition was to 
incur a grave social danger. Rents, interest payments 
and wages alike were, therefore, determined by public 
authority, either that of the State or that of the munici- 
pality. Survivals of public fixation of remunerations 
are to be found in the limitation of charges for certain 
legal services, in the regulation of railway rates, of pay- 
ments for cabs, ferry services and the like, and, above 
all, in the statutory limitation of the rate of interest. 
The imposition of a statutory minimum wage would be 
an instance of reversion to medieval practice. 

194. Guilds. — In addition to the regulative agency 
of the State there appeared also the regulative agency 
of the trade guilds acting either directly or through the 
municipality by means of the influence they exerted 
upon it. The whole conduct of business and, indeed, 
the whole conduct of life were subject to minute scrutiny 



204 ECONOMICS 

and to excessive regulation. No one could begin busi- 
ness of any kind or enter into a trade unless he had pre- 
viously pursued the course of education prescribed by 
the guild to which his trade belonged, and unless he was 
accepted by the guild. 

The story has often been related of how the improve- 
ment of the steam engine by James Watt ran risk of 
being at least delayed through the stringency of guild 
regulation and through the municipal power of the 
guilds even so late as the middle of the eighteenth cen- 
tury. Watt proposed to begin business in Glasgow 
as a philosophical instrument maker. The incorporated 
trade of Hammermen (the guild of master mechanics) 
objected to his doing so on the ground that the trade 
was really part of theirs, that Watt had not served a 
proper apprenticeship, and had not been accepted by 
them as a member. It was, therefore, impossible for 
Watt to establish himself in any part of the city of 
Glasgow which was under the jurisdiction of the mu- 
nicipality or the guild. 

The precincts of the University were not in this posi- 
tion ; and the professors of the University, among whom 
at the time was Adam Smith, offered Watt the use of 
premises within its walls. It was there that he devised 
the separate condenser and began the series of improve- 
ments by which he brought the steam engine from the 
laboratory table into the field of industry. 

195. Beginning of unrestricted trade. — The general 
movement toward freedom, which may be said to have 
had its beginning in the eighteenth century, was char- 
acterized by resistance to direct or delegated control of 
economic relations by the State. As a part of this 
movement, serfdom was abolished and the peasantry be- 
came free. Burdensome restrictions upon the employ- 



PROBLEMS OF DISTRIBUTION 205 

merit of artisans were removed and equally burdensome 
restrictions upon the sale of land and upon the employ- 
ment of capital were seriously modified. 

The effects of these changes in economic legislation 
and in municipal regulation of trade were numerous and 
complex, but important among them there were in West- 
ern Europe, the re-enforcement, and in Eastern Europe, 
the creation of a class of free laborers entitled by law 
to hire themselves wherever they could find employ- 
ment and for whatever wages they could procure. At 
the same time, many of the guild restrictions upon trade 
ceased to be operative, employers might enter upon new 
enterprises without leave of the organizations which in 
the eighteenth century had been all-powerful. The gen- 
eral result of the movement for liberty was the begin- 
ning of an era of competition in practically all the fields 
of industrial and commercial enterprise. 

The birth of the United States was almost coinci- 
dent with the effective beginning of the European 
movement for political and economic liberty. Indeed 
in one of its most important aspects, the American Revo- 
lution may be held to have been an incident in the strug- 
gle between the newly arising capitalistic interests and 
the old. The industrial development of Canada did not 
begin in a serious sense until toward the middle of the 
nineteenth century. It was stimulated by the commer- 
cial movement of a subsequent epoch. 

196. Competition the result. — The breaking down of 
industrial and commercial barriers was not accomplished 
without struggle, nor was it otherwise than very grad- 
ually brought about. Indeed it cannot be said even 
now to have been fully accomplished, for while old regu- 
lative methods fell into decay or were abolished, new 
regulative methods speedily came into existence. Yet, 



206 ECONOMICS 

in general, it may be said that the characteristic of the 
new period was an atmosphere of competition in which 
each member of each group of the contributories to pro- 
duction competed more or less effectively with every 
other member. In the course of this competition, the 
value of the services of each member came to be esti- 
mated in the same manner as the utility of the product 
was estimated in the market into which it was eventu- 
ally brought. In other words, each member of each 
group was a seller of his services in ^he market to which 
his larger group belonged. 

Thus, for example, as landownership became commer- 
cialized, the landowner whose land was occupied by a 
productive enterprise or who desired that his land should 
be so occupied or whose raw material was used by pro- 
ductive enterprises, came to be subject to the compe- 
tition of other landowners possessing other lands of 
similar character or offering other raw materials of a 
similar description. So, also, the capitalist became a 
seller in the market for capital where he found com- 
petitors also offering capital for sale. The free hirable 
laborer, no longer rendered immobile by restrictive prac- 
tice and legislation, became a seller of his labor in the 
open labor market, competing with other laborers offer- 
ing similar services. In all of these markets the con- 
ditions as to competition varied from time to time. 
Sometimes in each competitive field the demand was in 
excess of the supply and sometimes the reverse was the 
case. 

It should be observed, however, that while the removal 
of burdensome restrictions induced competition in fields 
where previously there had been little or none, competi- 
tion did make its appearance even under the restrictive 
influence of State and guild regulation. The earlier 



PROBLEMS OF DISTRIBUTION 207 

struggles of the small and the large capitalists and the 
earlier struggles of labor and capital show that at no 
time can it be said that competition was wholly absent. 
Regulations were not imposed without difficulty. Per- 
haps, especially under the most stringent regulations, 
flights of peasants and movements of artisans from one 
town to another in defiance of regulations were most 
frequent. State and guild regulations were thus suc- 
cessful rather in mitigating competition than is prevent- 
ing it; but as such regulations became of less effect, 
competition increased. 



CHAPTER II 

PROCESS OF DISTRIBUTION 

197. Factors of 'production. — We may now examine 
the factors of production in respect to the shares they 
receive in distribution in their respective markets. We 
shall afterward learn that the value of the product as 
determined in the market does not of itself afford any 
indication of the value attributed to any of the shares. 
Nevertheless the value of the product reacts upon the 
respective values of the services of the contributories, 
through the operation of demand in their respective m'ar- 
kets. The market for capital, for example, is affected 
by the demand for additional capital which comes from 
an industry in which the price of the product has in- 
creased, and this also is the case in the markets for land, 
for raw materials and for labor. Some of these reac- 
tions will later be indicated more fully. 

Since the co-operation of all of the factors in produc- 
tion is indispensable, a detailed examination in an in- 
quiry into distribution may begin with any one of them. 

198. Productive industries classified. — We may con- 
sider productive enterprises as falling into one or other 
of two classes: first, those which are organized by an 
individual employer or by a firm consisting of partners 
each of whom takes a more or less active share in the 
business and each of whom is responsible to the extent 
of his means for the obligations of the firm ; and, second, 

208 



PROCESS OF DISTRIBUTION ^09 

those enterprises which are carried on by j oint stock com- 
panies with limited hability on the part of their share- 
holders. The individual employer in the first mentioned 
class may undertake the employing function himself 
or he may entrust it to a manager who may receive a 
fixed salary or a salary plus a share of the profits. If 
the employer undertakes the duties of manager he must 
be considered as earning the salary which he would other- 
wise have had to pay in order to acquire the services 
of a manager. 

In the early part of the eighteenth century the typ- 
ical individual employer was also the manager of his en- 
terprise. He was a professional m.aster of his craft. 
He had served an apprenticeship, and his was the skill 
which conducted his busmess. 

Toward the middle of the eighteenth century, as the 
adoption of machinery became more prevalent, the 
skilled employer often found that neither his own capi- 
tal nor his individual credit was sufficient to enable him 
to extend his business. Country bankers often came to 
his assistance and became "silent partners" in the busi- 
ness, providing the whole or the greater part of the 
necessary capital and taking a previously stipulated 
share of the profits. 

As the general management even of manufacturing 
business becanie more and more an affair of bargain 
making, and of finance, including control of financial 
sources, the separation of function between the technical 
management and the business management in the strict 
sense became more and more common. The qualities 
demanded for the exercise of the technical function were 
not the same as those demanded by that of the business 
function and, although both were necessary, it became 
common for the business expert to employ the technicrl 

C— I— 14 



glO ECONOMICS 

expert. Thus those employers who were technically 
qualified and who at the same time had an aptitude for 
business frequently achieved great prominence and ac- 
quired great fortunes, while those who were not so en- 
dowed were obliged to sink from the position of master- 
ship to that of employment. This process has gone far 
in the United States, where the heads of manufacturing 
businesses usually have had a legal, mercantile or finan- 
cial rather than a technical training. 

In the second class of enterprise the function of em- 
ployer is exercised partly by the elected directorate of 
the joint stock company and partly by the general man- 
ager appointed by it. The service of the directorate is 
remunerated by fixed payments voted to the directors 
by the shareholders and the services of the general man- 
ager is remunerated by a salary fixed by contract and 
sometimes supplemented by a share of the profits or 
by a bonus voted to him either by the directors or by the 
shareholders. 

The growth of company enterprise has been one of 
the most conspicuous economic features of our time. 
The company system is, however, not new. There were 
immense companies in the later days of the Roman Re- 
public and in the earlier days of the Empire. In the 
middle ages the Hanseatic League, which in many im- 
portant respects was analogous to a modern trust, con- 
trolled a large part of international trade. In the six- 
teenth, seventeenth and eighteenth centuries a large part 
of the business of every country was controlled or con- 
ducted by mercantile companies with state charters. 

199. Large corporations. — The large company with 
numerous shareholders, numerous estates in land, large 
capital funds, numerous productive enterprises, and re- 
lations with interlocking banks, and practising more or 



PROCESS OF DISTRIBUTION 211 

less remorseless competition with individual traders and 
manufacturers and with small firms, has possessed itself 
of a large part of modern business. The reasons for this 
development have already become apparent. They lie 
partly in the necessity for large accumulated capital, in 
order to provide the control of raw materials and the 
machinery of modern industry and partly in the in- 
creased economy of manufacture under wholesale con- 
ditions. 

The continuity and scope of an industrial enterprise 
is always more or less in peril when its success depends 
upon the skill, prestige and health of one person. Em- 
barrassment may readily ensue in the event of the sickness 
or death of an employer who conducts his own business, 
and who has no one trained to take his place. The trans- 
ference of a business to a joint stock company is thus 
a measure of insurance for its continuity and expansion. 
Moreover, the provision of additional capital by a small 
number of individuals becomes, after a certain point, a 
matter of difficulty. Such provision is often greatly 
facilitated by the division of the risk and of the profit 
among a large number of persons. Banks and other 
creditors frequently insist upon the formation of a busi- 
ness into a joint stock company for these reasons. The 
abundance of technically skilled persons on the one 
hand and the abundance of free hirable labor on the 
other, have also contributed to the growth of the joint 
stock company ; and as the position of the small employer 
becomes untenable because of the effectiveness of the 
competition of the company, he becomes a competitor 
for employment in one or another of the sections of the 
labor market. 

One of the consequences of company promotion is the 
union of two or more industrial or other enterprises into 



212 ECONOMICS 

one company for the purpose either of uniting the forces 
of competitors in the same market, and so limiting' com- 
petition, of controlling the sources of supply and raw 
materials, of economizing in the expenses of manage- 
ment or of getting the goods to the market by means of 
advertisement or otherwise. By combinations of this 
kind production may be controlled and overproduction 
within the limits of the operations of the company 
avoided. 

The combination of two or more private firms in one 
joint stock company may lead to the abandonment of a 
plant which in the combined enterprise has been found 
to be obsolete or unnecessary. When the United States 
Steel Corporation was formed many plants were 
"scrapped" because they were regarded as superfluous. 

Further pursuit of such a policy in the combination of 
companies either by absorption or by alliances of a more 
or less formal character has led to the building up of 
what are known as Trusts. These united companies, 
some of which have reached gigantic proportions — espe- 
cially in the United States — have been of late years not 
only conducting a large proportion of the domestic trade 
of the United States, but have been entering veiy largely 
into foreign trade. The operations of the Standard Oil 
Company and of the Tobacco Trust are practically world 
wide. Some of these Trusts have become in effect huge 
international combinations. 

200. Effect of large enterprises. — The result of the 
growth of large capital, when placed at the disposal of 
employers, has in all ages been the same. It has always 
led to a stniggle between the large and the small capi- 
talists and between the large and the small employers. 
This struggle became very acute in the sixteenth and 
seventeenth centuries, and it has again become very acute 



PROCESS OF DISTRIBUTION 213 

in the present time. The struggle of rival capitalist in- 
terests was inevitably carried into the field of politics, 
each interest endeavoring to enlist the State in aid either 
of its defence or of its aggression. In all of the historical 
cases, the struggle has not been a purely economic one. 
The small merchants have always enlisted on their side 
such democratic sympathies as the times afforded, while 
the greater merchants and the large companies have been 
able in general to enlist upon their side the influence of 
the governing classes. 

201. Employer s position in process of distribution. — 
The individual employer or the privately organized firm 
embarking in an industrial enterprise, either uses already 
accumulated capital or purchases that capital on more 
or less remote terms of payment from some other person, 
firm or group of persons. In any event, the entre- 
preneurs either exercise the function of capitalists or 
they arrange with others to do so. They go into the mar- 
ket for capital and buy it on certain terms. These terms 
will depend upon the conditions which affect the money 
market at the time and they will depend also upon the 
individual credit of the entrepreneurs or enterprisers and 
upon the estimation which the market makes of the likeli- 
hood of the success of the enterprise. 

Similarly the enterpriser negotiates in the market for 
land. He selects a site which he thinks will serve his 
purpose and if he finds that the price asked for it is more 
than he feels justified in paying, if he fails to bring the 
owner of the land to his terms or near to them, he will 
take a less suitable but a less expensive site. He will 
either purchase the land with a portion of the capital 
which he has procured ( a usual case in the United States 
and in Canada) or he will lease the land at a specified 
rent per year for a certain number of years (the usual 



214 ECONOMICS 

case in Great Britain and in Continental Europe). In 
either case he will either exercise the function of land- 
owner or he will allow someone else to exercise it, pay- 
ing him the market price for his services. 

The enterpriser will then proceed to arrange his staff 
of employees by employing superintending labor and 
manual labor ; first, in order to erect the necessary build- 
ings and to install the necessary machinery and, then, 
after the purchase of the necessary raw material, to carry 
on the process of production for which the factory (or 
other industrial establishment) has been designed. 

The enterpriser has now expended all his fixed capital 
and a portion of his circulating capital, and he has thus 
incurred certain periodical obligations in respect to the 
payment of interest. He has also incurred certain peri- 
odical obligations involving the payment of an addi- 
tional amount of interest in respect to the capital he 
has invested in land or he has incurred obligations in re- 
spect to the payment of rent for the land upon which 
he has built his factory. He has also entered into certain 
contracts for the raw material and for the superintend- 
ing and manual labor necessary for the production of the 
product he intends to manufacture. 

202. How result of production is distributed. — When 
the finished product makes its appearance he sends it into 
the market and he encounters the chances of that market. 
He offers an addition to the former supply; if the sup- 
ply otherwise has remained the same while the demand 
has not altered, he may be obliged to accept a price 
lower than that of the previous market unless he can 
stimulate demand to such an extent as to cause an in- 
crease of demand and thus to cause maintenance of the 
price. As he sells his product and as he is paid for it, 
his depleted fund of circulating capital is restored; as 



PROCESS OF DISTRIBUTION 215 

he continues to produce, his fund is depleted again, and 
again restored and so on. 

If the total yield from the sales of his product just 
equals the expenses of production including interest upon 
capital, rent, purchase of raw material and wages for 
superintendence and for manual labor, he will even then 
not have been able to secure the continuity of his busi- 
ness. In addition to the net return as above indicated, 
it will be necessary for the enterpriser to have secured 
out of the total value of his product as realized in the 
market, sufficient to pay the taxes levied upon him by 
the state and by the municipality, together with an 
amount sufficient to pay the premiums .upon a policy 
of fire insurance, and the premiums upon a policy of in- 
sm'ance against his liability as an employer for accidents 
which may happen to his workmen. It will also be nec- 
essary for him to provide for repairs to his machinery 
and for depreciation, and to provide for the creation of 
a reserve fund against the risks of bad debts and any 
other trade risks to which his business may be subject. 
Only after all these obligations of various kinds have been 
met out of the yield of his product in the market is he 
entitled to regard himself as having earned anything. 
If his business has yielded him only just sufficient to cover 
his obligations, he has neither salary nor profits for him- 
self. 

203. Deficiency or surplus? — If his enterprise does 
not yield sufficient to defray his obligations, he may 
nevertheless carry it on for a time, meanwhile obtaining 
fresh capital in the hope that eventually the yield will 
increase; but if he exhausts his credit before the yield 
does increase, the enterprise must come to an end. 

On the other hand, if the yield over a certain period, 
say one year, is sufficient to cover his obligations during 



216 ECONOMICS 

that period, and to yield even a surplus, that surplus, 
according" to the current system of employment, belongs 
to him. He may regard part of the surplus as salary — 
an amount sufficient, let us say, for his personal and 
household expenses — and part of it as net profit. This 
portion may be devoted to the creation of a reserve fund, 
against the possibility of diminution in trade or in the 
price of his product ; or it may be devoted to the repay- 
ment of some of his borrowed capital (in which case he 
would to the extent which the amount represented, exer- 
cise the function of capitalist) or to the extension of his 
factory ( in which case he would also exercise tke function 
of capitalist ) . 

204. Employer's double function. — In the course of 
his operations, the enterpriser or employer, as part of his 
function as organizer, has exercised the function of dis- 
tributing the value of the product. He has exchanged 
the product in the market for its value in money, and 
he has distributed this money or a portion of it among* 
the persons who contributed to the productive process. 
The individual shares of these contributories have not 
been determined in the market for the product, nor have 
they been determined arbitrarily by the employer. They 
have really been determined for him in the various more 
or less competitive markets into which it was necessary 
for him to enter in order to obtain the services and the 
material means whereby he conducted his industry. 

205. Influence of supply and demand. — The employer 
is thus, neither as employer nor by design, a benefactor. 
He is engaged in an enterprise by which he expects to 
make not only a living for himself but even to realize an 
indefinite sm'plus. He is, in short, engaged in the pur- 
suit of his own interest whether he is working up a small 
business or conducting a large one which had been 



PROCESS OF DISTRIBUTION 217 

worked up to a position of magnitude by himself or by 
others from whom he acquired it. The other contribu- 
tories to the production whose services he has organized 
are also engaged in the pursuit of their own interests, 
but their position is characterized by an element which 
is absent from the position of the employer. They render 
their services for certain definite periodical payments. 
These payments are due, whatever may be the gross or 
the net yield of the business. A fall in price of the prod- 
uct may take place, but rent, interest, salaries and wages 
are unaffected provided they have been previously stipu- 
lated. In each case there is, of course, risk of eventual 
loss, although the employer is liable in the first instance ; 
but, in the case of salaried and wage-paid labor, the risk, 
owing to the frequency of the periodical payments, is 
usually relatively small. 

On the other hand, in the event of an advance in price 
of the product or an increase in the gross or net yield of 
the enterprise, these payments still remain unaffected. 
If, however, such an advance in the price of the product 
or increase in the gross or the net yield of the enterprise 
takes place, even if the increase is due to economies in 
management special to the enterprise, there will be an 
inducement for other enterprisers to enter into business 
of a similar character. In consequence, demand for land, 
capital or labor will be diverted from other channels 
of demand, and the prices of these for the particular 
purpose in question will tend to advance. As the con- 
tracts for the supply of these factors run out, the enter- 
prisers earlier in the business must also pay increased 
rents, interest and wages ; and unless some other conflict- 
ing factor enters they will have to continue to pay in- 
creased rents, interest and wages until the net profits 
of their enterprises come down to the rate or near to 



218 ECONOMICS 

the rate of the profits of other industrial enterprises of 
the same general character. The reactions of the market 
thus tend to equalize profits of different industrial en- 
terprises and to increase or to diminish rent, interest and 
wages according to the demand and supply of land, 
capital and labor. 



CHAPTER III 

PROFIT AND WAGES 

206. Source of 'profit, — :I.n the analysis of the pro- 
cesses of production and distribution which precedes we 
have seen how the employer, as employer in the strict 
sense, is an administrator and organizer. He is not a 
landowner, he is not a capitalist and he is not a manual 
laborer. He is a payer of rent, of interest and of wages 
to other'persons who exercise the functions of which these 
are the remunerations, in connection with the enterprise 
which he (the employer) has organized. The primary 
business of tlie employer, as such, is to continue his en- 
terprise and to adopt the measures necessary to that end. 
He must endeavor to obtain from the products of the 
enterprise enough to remunerate the various agents he 
has employed — the landowner, the capitalist and the la- 
borer — he must provide the raw materials by purchase 
as they are required, he must provide for the repairs of 
his machinery as the parts wear out, he must set aside 
a sum for a depreciation fund to replace machinery that 
may have been wholly worn out or may have become obso- 
lete.^ When all of the charges upon his income have been 
met and when he has set aside an amount for his own 

^ In certain industries this depreciation of machinery from both causes is 
very great. During the period of active improvement of electrical machinery, 
for example, careful users customarily set aside about 123^% per annum upon 
the value of the machinery conceiv'ng that it would be practically valueless in less 
than eight years not because iti was worn out but because it was superseded by 
some new invention. 

219 



220 ECONOMICS 

personal maintenance, the employer may find that there 
is a surplus or that there is a deficiency. If there is a 
deficiency, it will be necessar}^ for him to economize in 
some way, otherwise the continuity of his enterprise, 
which is his first concern, will be compromised. If there 
is a surplus, that surplus may be regarded as net profit. 

207. How is profit brought about? — If a method of 
analysis is adopted, by which the whole of the receipts 
of the employer, after he has paid the more obvious 
charges upon his total receipts, is described as gross 
profit, then the amount according to the above analysis, 
after the additional deductions which have been detailed, 
might be described as net profit. The question is: how 
does this profit arise? It may arise from one or the other 
of two main reasons. It arises either by design or ad- 
ventitiouslj^ 

Profit is designed if the employer, through his shrewd- 
ness in making bargains for land, capital, labor and raw 
materials, and through shrewdness in making bargains 
for the sale of his product, or through economy in the 
management of his business, or by influencing legislation, 
enhances his gross income. It arises adventitiously, if 
from a change in market prices of capital, labor and raw 
materials which he buys, or in the finished product which 
he sells, he is able to diminish the cost of production of 
the coiTimodity whose manufacture he has organized or 
to enliance the aggregate price he obtains for that com- 
modity. 

Shrewdness and activity may be pushed too far, that 
is, farther than is recognized as permissible by those 
with whom he transacts business. For instance, some 
part of the profit may be attributed to a too sharp bar- 
gain in raw material where the buyer has taken advan- 
tage of economic weakness on the part of the seller to 



PROFIT AND WAGES 221 

beat down the price below the current market rate; or 
a part may be attributed to a too sharp bargain with 
workmen or other employees. In the latter case the em- 
ployer may be accused of exploiting them and of taking 
in profits what ought to have been paid to them in 
wages. Or he may be guilty of adulterating his product, 
or of some fraudulent practice of a similar kind. Such 
cases, no doubt, occur, but even if they were universal, 
which cannot be supposed to be the case, they would not 
account for that portion of the surplus which has been 
described as adventitious profit. Against this adven- 
titious profit there must be set adventitious loss, which 
may occur even in cases where the most shrewd forecasts 
have been made, and which may occur through neg- 
ligence or intentional destruction by employees. 

208. Profit distrihutio7i in joint stock conipany. — The 
case of the joint stock company is, so far as the main 
facts are concerned, very similar, except that while the 
actual function of employer is exercised by salaried of- 
ficials who are not necessarily paid in accordance with the 
yield of the business (although if their activities do not 
result in the return anticipated, they may run risk of 
discharge), the surplus, if an}^, is taken, and the loss, 
if any, is borne by the shareholders. These shareholders 
have ordinarily no effective share in the management of 
the business. In the case of large companies, where the 
body of shareholders varies with the purchases and sales 
of the stock in the market, they could not have any effec- 
tive control. They, therefore, merely add to the function 
of capitalist (since by them or through their credit the 
capital is supplied) part of the function of enterpriser, 
the control or absorption of the profits and the sustain- 
ing of losses accruing in the enterprise. 

209. Employer s associations. — We have considered 



222 ECONOMICS 

the cases of combination of interest of employers in joint 
stock companies and of the combination of these com- 
panies into trusts. There are, however, other forms of 
combination which may be entered into by individual 
employers without sacrificing their independence as such. 
Of this nature are employers' associations formed for the 
purpose of protecting the interests of their members by 
common action. Such associations have been formed 
with, in general, two objects. One of these is to watch 
or promote legislation bearing upon the interests of em- 
ployers or to observe the administration of the laws 
affecting their interests. The other general object is 
to take common measures, where these are possible or 
advisable, for the protection of their members in respect 
to their relations with landowners, capitalists and la- 
borers. 

Under the first object the employers' associations con- 
sider alterations in the bankruptcy laws, in the tariff and 
tax laws, in the banking laws, in the immigration laws 
and especially in those laws which fall into the category 
of social legislation. Under the second object, the ques- 
tion of labor disputes is the most conspicuous. 

Although the employers' association in one form or 
another preceded the trade union, it represents in a man- 
ner the combination of employers in answer to the com- 
bination of laborers. The collective bargaining of the 
laborers has as its counterpart the collective bargain- 
ing and the combination for mutual interests of the em- 
ployers. 

210. Superintending labor. — In modern industrial 
enterprise, the labor of superintendence has assumed a 
large place. As the use of complicated machinery has 
extended, as the organization of large bodies of men 
has become more common and as the operations of the 



PROFIT AND WAGES 223 

market (in the purchase of raw material and in the sale 
of the finished product) have become more intricate, the 
role of superintending labor has become more impor- 
tant. The technical heads of departments and the aux- 
iliary technical heads in large enterprises form now, 
in the aggregate in all industrial countries, immense 
groups. 

These groups occupy a position intermediate between 
the employers and the manual laborers; and the judicious 
selection of individuals for the exercise of the function 
of superintendence has become a matter of great impor- 
tance. Superintending laborers are generally, although 
not always, educated in some branch of technology ; they 
have more or less intellectual interests and are, therefore, 
less exclusively concerned with the commercial interests 
of the enterprise than their employers. They are also, 
owing to their rarity in the superior ranks of their re- 
spective professions, more independent of other social 
groups than either the employer or the workman. 

211. Salaries. — Although superintending laborers 
have in some cases trade unions in the form of profes- 
sional societies, these societies rarely act as combinations 
for the advance of salaries, because collective bargaining 
in cases of very divergent technical skill is not practi- 
cable. Salaries under such conditions are regulated 
partly by custom and partly by the market for superin- 
tending labor. 

In the higher ranks, salaries are sometimes very high 
in relation to other professional employments because 
the opportunity of gain to a business through competent 
management is great, and the possibility of loss through 
incompetent management is also great. A large in- 
dustrial combination was effected in the United States 
in 1903. The manager of the largest of the constituents 



224 ECONOMICS 

which were absorbed by the new company was appointed 
managing director of the whole at a salary in excess 
of his previous salary and for a period of five years. At 
the end of six months it became evident to the directors 
that they had made a mistake. They compromised with 
their managing director, paying him a large smn by 
way of compensation for breach of contract, and they 
appointed another manager at double the salary pay- 
able in the previous case. They found themselves worse 
off than ever. In three months the new manager in- 
volved them in losses amounting in the aggregate to ten 
times his salary for a year. He was called upon to resign 
and they offered a still higher salary, hoping by this 
means eventually to secure a thoroughly competent 
man. 

The demands upon the occupants of such positions are 
very great. The qualities which are necessary are not 
easily acquired; sometimes they cannot be acquired on 
any terms of application. Those who are fortunate 
enough to possess the germ of the requisite qualities at 
the outset of their careers, and who will devote the neces- 
sary time to a study of the fundamental principles of 
business, may go far, 

212. Education of superintending laborers. — The 
prospect of great prizes excites ambition and the junior 
ranks of the professional class tend to become over- 
crowded and, therefore, to be underpaid. In the more 
fluctuating branches, such as mining and railway con- 
struction, there may indeed oh occasion be much unem- 
ployment in the professional class, because owing to the 
conditions of scientific specialization it is not easy to 
pass from one form of professional employment to an- 
other. 

The provision of instruction for the professional classes 



PROFIT AND WAGES gS5 

during the period of tutelage they must undergo in 
order to fit them for their work, has formed a heavy tax 
upon the educational institutions which have undertaken 
this duty. Scientific apparatus is costly and the pro- 
vision of technically competent instructors is more costly 
than in some other branches of education, because of the 
competition for first-class men in the ranks of the tech- 
nical professions. Currents of public opinion have alter- 
nately run in favor of assistance from the public treas- 
uries of professional education, and against such a 
measure on the ground that professional employment is 
so profitable that those who enter it should defray the 
cost of their own professional education. 

In general, a compromise has been effected. In the 
professional faculties in most universities and colleges, 
the fees are in excess of those charged in the non-pro- 
fessional schools, although they are rarely if ever suffi- 
cient to defray the whole cost of professional education. 
The objection that is sometimes heard that the interests 
of the professional class and those of the employing class 
are really identical, and that the educational policy which 
leads to the increase in the numbers or efficiency of the 
professional class at the public expense is injurious to 
the influence of labor is not valid, because labor has 
more to lose through an incompetent or numerically 
insignificant professional class than could possibly be 
gained by the absence of it. Moreover, the increase in 
numbers and the consequent probable proletarianization 
of the professional class must tend in certain groups of 
it to identify its interests with those of labor for good 
or ill. While it is difficult to organize labor when it be- 
comes highly specialized, it is even more difficult to 
organize the professional classes because of the "water- 
tight compartments" into which they tend to separate, 

C— I— 15 



S26 ECONOMICS 

and because of the individualistic habits of hfe and 
thought which are engendered by the absorption in pro- 
fessional interests into which members of the professional 
class customarily fall. 

213. Classes of manual laborers. — All of the markets 
in which the contributors to production offer their serv- 
ices have certain features in common, and each of them 
has certain peculiarities. The labor market has, in com- 
mon with the market for capital, the feature of division 
into sections, which, in ordinary conditions of the market, 
are non-competitive. In other words, the law of sub- 
stitution does not normally apply to the relation of such 
sections. 

At the base, as it were, of the labor market, there is the 
mass of general laborers, men, women and children, not 
specially skilled in any craft but available for the rougher 
manual or for light unskilled labor in many crafts. In 
this mass, also, there are usually some who have dropped 
into it from special handicraft, owing to changes in the 
crafts through the adoption of automatic machinery or 
otherwise, to their own inefficiency or defects of char- 
acter or to misfortune. In this group the competition 
for employment is at all times considerable and is some- 
times acute. 

Above this mass is a plane of separate sections — each 
containing the craftsmen in special industries — carpen- 
ters, bricklayers, mechanical engineers and the like. 
While there is normally more or less severe competition 
within each section, there is little or no competition be- 
tween the sections. Thus, for example, carpenters do 
not compete for employment with bricklayers, nor do 
watchmakers compete with mechanical engineers. When 
trade is stagnant in the superior handicrafts, craftsmen 
do not usually pass from one highly skilled occupation 



PROFIT AND WAGES 227 

to another, but if they find it impossible to secure employ- 
ment in the trade in which they have been trained, they 
drop temporarily into some inferior employment where 
skill is not so specialized. At all times, certain occupa- 
tions afford a refuge for men who, for various reasons 
have abandoned the trade for which they were originally 
trained. Thus, men of all trades become street car con- 
ductors, club and hotel waiters, teamsters, firemen, deck 
hands on steamships and the like. 

In the sections of the labor market in which specialized 
skill is necessary, and with which there is little or no ex- 
ternal competition, there is often acute competition 
within the section itself. For example, if at a particular 
moment there is a great demand for compositors in 
Buffalo or in Toronto, which are important centres of 
the printing trade, compositors will go to these cities to 
seek employment. If they go in excess or if the demand 
is only temporary, they will either have to go elsewhere 
or they will compete with one another for employment 
even if the wages be uniform. 

214. Uniform wages. — The uniformity of wages 
which has been imposed by some trade unions and de- 
liberately adopted as a policy by some employers, has 
mitigated this sectional competition and altered its char- 
acter but has not removed it. An important mitigation 
has also occurred in those trades in which the number 
of apprentices is limited by agreement between the em- 
ployers and their men. These measures have un- 
doubtedly led to greater care in selection of men by em- 
ployers. If they must pay equal wages to efficient and 
inefficient workmen, they will endeavor to eliminate the 
inefficient, and if they can have only a few apprentices, 
there must be no idle apprentices among them. It is 
probable that through the influence of trade unions in 



228 ECONOMICS 

this direction there has been some increase in industrial 
efficiency. 

On the other hand, it might be argued that these 
measures have not tended to humanize the relations be- 
tween workmen and their employers; and that the uni- 
form wage results in the dismissal of the workman so 
soon as he is past his prime, while otherwise he might be 
continued at a reduced wage. 

215. Old age pensions. — The adoption of a uniform 
wage seems to have as inevitable consequence the estab- 
lishment of old age pensions, either by separate indus- 
tries, groups of industries, or by the State; unless it is 
to be supposed that the uniform wage during the years 
of labor is sufficient to enable the normal workman to 
save enough to keep himself and his family after he has 
ceased to be worth the wages earned by him in his prime. 
It is true, however, that there are many industries in 
which the years of activity are so few that adequate 
saving is impossible, and an old age pension system, 
which would be applicable in such cases, would require 
to be given at so early an age that it could not be uni- 
versally applied. The question whether recipients of 
pensions should be encouraged or even permitted to work 
has been much discussed in Great Britain since the pass- 
ing of the Old Age Pensions Act. 

The problem may be put in the form of a dilemma. 
If the pensioners are allowed to work, they compete in 
the labor market and reduce wages; if they are not al- 
lowed to work, the national aggregate is less by the 
amount of their product than it would have been had 
they been permitted to work. It is fairly obvious that 
the balance of advantage lies in allowing pensioners to 
earn wages if they can. There is another consideration : 
it is a doubtful policy to impose a direct penalty in the 



PROFIT AND WAGES 229 

form of compulsory idleness upon those who have a 
pension from the State. 

216. Labor organizations. — In those trades in which 
specialized skill is not requisite, or in which the requisite 
skill may readily be acquired in a short time, the compe- 
tition is most acute, the changes of personnel in a work- 
shop or factory most frequent and labor combination in 
a trade union most difficult. Spasmodic attempts are 
made from time to time to organize garment workers 
(men and women) , workers in box factories and the like. 
Sometimes the activity of the organizers has resulted in 
strikes and in the improvement of the conditions of la- 
bor or in increase of wages; but usually the casual and 
fluctuating character of these occupations and the diver- 
sity of nationalities have rendered permanent organiza- 
tion of the workers extremely difficult. 

The system of an uniform wage which is indispensable- 
in the maintenance of sectional trade unionism cannot 
be applied over the whole field of industry, and is, there- 
fore, not an essential feature in a general labor organ- 
ization. Such organization has indeed usually as its 
unifying influence some political programme because of 
the variation in economic programmes which exists in 
the ranks of labor. 

217. Difficulty of transporting labor. — There are cer- 
tain characteristics which are peculiar to the labor mar- 
ket. For example, while capital in the form of con- 
sumable commodities, or otherwise, is more or less mobile, 
labor is not very readily transported. This characteris- 
tic varies, however, in different races and under different 
conditions. There is, for example, a strong inclination 
toward migratory habits among the Russian people. 
The same inclination exists, though not to the same de- 
gree, among people of German origin; the French, on 



230 ECONOMICS 

the other hand, are reluctant to move. In many differ- 
ent parts of the world there are periodical migrations 
of great magnitude. About one million farm laborers 
migrate during the Russian harvest season, going south- 
ward from Central Russia and then travelling northward 
harvesting as they go, toward the regions of the later 
harvests. Similarly vast numbers of Italian peasants 
migrate to the Riviera for harvesting, and great num- 
bers of Irish laborers cross annually to Scotland for the 
same purpose. So, also, farm laborers go from the mari- 
time provinces and from Ontario to the prairie prov- 
inces of Canada for harvest, returning when harvest is 
over. In each of these cases distance is no barrier. 

Apart from temporary migrations, there are the great 
permanent movements of peoples of which the settle- 
ment by Europeans of the two Americas and of Austral- 
asia are the most conspicuous modern examples. People 
even migrate from one new country to another. It is 
a matter of frequent observation that people who have 
with difficulty once uprooted themselves from a long ac- 
customed home will have little hesitation in migrating 
a second time if they think it advisable to do so. Thus 
groups of German and other immigrants, both in the 
United States and in Canada, have emigrated and set- 
tled in the eastern portions of these countries and then 
after an interval have migrated westward or northward. 

Nor does the extent of migration, except across the 
Atlantic Ocean, appear to have increased materially 
on account of improved means of communication. 
Throughout Europe, in the early middle age, the great 
difficulty lay in preventing people from wandering 
about, not in inducing mobility. Adam Smith's dictum 
that the man of all baggage is the most difficult to trans- 
port was really true only of the Scots and the French, 



PROFIT AND WAGES 231 

the only two peoples with whom Adam Smith was fa- 
miliar, and since liis day it cannot be said to be true of 
Scotchmen. 

This relatively great mobility of labor is, however, 
qualified by the circimistance that while capital is, as 
a rule, moved from one place to another by persons 
skilled in such movements, labor is frequently moved in 
great masses without intelligent direction. In northern 
countries, the harvest is short, the information about de- 
mand for labor is tardily distributed and it therefore fre- 
quently occurs that there is abundance of labor in one 
place while in another at no great distance there is 
scarcity. Sometimes laborers in their own interest re- 
frain from communicating to others the fact of demand 
for labor, and the absence of organization among farm- 
ers prevents them from procuring even readily available 
supplies. This is particularly true of south eastern 
Russia during harvest time and it is to some extent true 
of the prairie provinces of Canada. Mobility or the 
absence of it may thus under certain conditions affect 
the rate of wages over a wide region. 

218. Labor cannot he stored. — The second important 
special consideration affecting labor in its own market 
is that it is in the position of a perishable commodity. 
It must be sold when it is available, otherwise it is irre- 
trievably lost. If there were any means of storing la- 
bor force in such a way that it might afterwards be liber- 
ated in any desired direction, the position of the laborer 
might be materially altered, provided he had himself 
control of the reservoir in which his labor was stored. 
The falling power of water is stored in this way, so also 
is electricity in electrical accumulators; but no inven- 
tion relating to labor storage has yet been promulgated. 
Labor may be stored in the sense of being applied to 



232 ECONOMICS 

production of utilities which are kept in reserve, but this 
is not the same thing as storing the force which may be 
used at will at any time upon the production of any 
utility. 

In the absence of an automatic mechanism of the kind 
suggested, the laborer must sell his labor, even in an 
overstocked labor market, because he must live. He 
may get for his labor barely enough to enable him to 
exist; but "half a loaf is better than no bread." This 
consideration is based upon the assumption, which in- 
deed is very usually the fact, that the laborer is a laborer 
pure and simple ; that is, that he is not in any sense either 
a landowner or a capitalist. It is assimied, further, that 
he is destitute of credit. This, however, is not always 
the case. The extent to which the small retail dealers 
relieve distress during times of crisis by extension of 
credit is very remarkable, and it accounts for the patron- 
age of the large retail cash stores by the middle class 
rather than by the working class. The Truck system, 
a system by which the employer supplies his workmen 
with the commodities they consimie, is very prevalent 
in the United States. It has long been prohibited by 
law in Great Britain. 

Such being the case, the laborer is an urgent buyer 
of the means of life and he has no resources to oifer in 
exchange excepting the labor of his head and his muscle. 
While, however, the laborer, as laborer, is in this posi- 
tion, he is not always laborer pure and simple. The elite 
of labor in all coimtries has its savings and investments 
in public securities or otherwise, yet it cannot be denied 
that the mass of the proletariat or landless working 
class — especially in Europe — is in the position charac- 
teristic of the laborer as such. 



CHAPPTER IV 

RATE OF WAGES 

219. Value of products and value of wages. — We 
must now ask what are the causes which, in general, de- 
termine the rates of wages, and what are the causes 
which, in general, determine the share of the national 
aggregate product which passes into the hands of the 
laborer. The causes which determine in any market the 
value of the products which are brought into it for ex- 
change are, as we have seen, very complicated. Each 
of these causes acts upon the labor market through the 
prices of commodities and through the demand for them. 

220. Nominal and real wages. — While the workman 
naturally considers his wages high or low in respect to 
the pecuniary or nominal amount of them, the spending 
power which his wages afford constitutes their real 
amount. His wages are thus really high or low in re- 
spect to the quantity of food, clothing and shelter which 
they enable him to acquire. Thus the difference in 
wages at different periods or at different places cannot 
be expressed fairly unless we are able to set forth, not 
merely the amount in money, but also the purchasing 
power of that money in the commodities respectively con- 
sumed. 

If, for example, the wages of a Chinese coolie are at 
one date equivalent to 100 pounds of rice for a certain 
period when rice is 4 cents per pound, and at another 
are equivalent to 133 pounds of rice when rice is 3 cents 

233 



234 ECONOMICS 

per pound, his real wages, provided he consumes only- 
rice, have advanced 33 per cent., although his nominal 
wage may remain unaltered. 

The bare statement that urban wages are higher than 
rural wages is insufficient without the explanation of 
the difference between the prices of food, clothing and 
shelter in the respective areas. So, also, would be the 
statement that wages have risen during the past fifty 
years unless we are informed of the prices of the com- 
modities in normal consumption, and of the rates of 
rents for house accommodation in relation to the normal 
rates of wages during the period. A curve showing the 
rates of wages thus means nothing unless it is accom- 
panied by a curve showing the prices of the commodities 
which enter into the consumption of the wage earners 
whose wages constitute the data from which the curve 
is drawn. 

221. Efficiency of laborer. — The determination of 
wages may be looked upon from two points of view. 
From the first point of view we may consider the rate 
of wages by the week or month or we may consider the 
total amount of wages for the year, idle time due to 
sickness, holidays, unemployment, etc., being accounted 
for. From the second point of view we may consider not 
the rates or amounts of wages in individual trades, but 
the wage bill of the wage earners as a whole, regarded 
as a portion of the "national" or "social dividend." 

Under all conditions, the efficiency of the laborer 
varies widely, and uniformity of wage does not by any 
means imply uniformity of return to labor in produc- 
tion. If wages nominal or real were fixed arbitrarily 
by public authority at a uniform rate, the method of 
determining wages would appear to be simple, yet the 
return to labor in production of one group of person^ 



RATE OF WAGES 235 

compared with that of another would exhibit wide varia- 
tions. Under normal conditions of production, the pro- 
ficiency of one group compensates for the deficiency of 
another. 

We may regard the services of labor in production as 
being rendered by groups of varying efficiency. The 
groups of the highest efficiency normally move in a rare- 
fied competitive atmosphere, and when they sell their 
labor, they have, therefore, an advantage over those of 
inferior efficiency who encounter more numerous com- 
petitors. Provided his efficiency is recognized by those 
who are in a position to employ him, and provided also 
there are no radical faults of character or habits which 
compromise his efficiency, the highly efficient worker in 
any field is in the position of a quasi-monopolist. If 
there is demand for his services he can drive a favorable 
bargain, although if there is no demand for the par- 
ticular variety of efficiency which he possesses, it may 
remain unutilized. 

At the other end of the scale is the least efficient group. 
Such a group is employed when industry is so brisk that 
every willing hand must be enlisted in its service. When, 
for any reason, industry becomes less active and em- 
ployers begin to discharge workmen, the members of 
the least efficient group are normally the first to be dis- 
charged. During periods of industrial fluctuation, this 
group oscillates between employment and unemploy- 
ment and between a self-sustaining status and the status 
of recipients of public or private charity. Whatever 
may be the state of industry and whatever the period, 
there is always such a group, and this group in this posi- 
tion may therefore be regarded as the marginal group 
• — that is to say, that group whose utility as productive 
agents is the least it is worth while to use. 



236 ECONOMICS 

222. Marginal wages. — Over the field of industry 
there are numerous groups of this description, corre- 
sponding with the number of occupations. The labor 
of these groups is marginal labor. To put the matter 
concretely, an employer knows when he employs a work- 
man that he will get at least the value in labor that is 
represented by this margin ; therefore, he will be willing 
to pay a rate of wages equivalent to that value. 

There will always be a marginal wage as there is 
always a marginal group, and this marginal wage will 
be just sufficient to attract into the industry the number 
required in it at any particular moment. If, in con- 
sequence of increased demand or otherwise, the price 
of a finished product advances, the manufacturers of that 
product will increase its production and they will there- 
fore require more workmen. The reserve of labor may 
be, however, under such conditions low, and the supply 
price of labor may have advanced in consequence. But 
the demand price has advanced also because our em- 
ployer is obtaining a higher price for his product and 
the marginal worth of labor to him has risen. He is 
thus able to meet the demand for higher wages from 
the workmen whom he already has in his employment 
and from recruits whom he may wish to employ. 

It must be observed, however, that if any of the sup- 
ply prices of other elements of production should ad- 
vance, the power to give an advance to any one of them 
would be limited by the urgency of the claims of others. 
Thus, an advance in the prices of the raw materials 
might render an increase in production of the finished 
material uneconomical in spite of advance in its market 
price. The demand for labor might thus be checked and 
the marginal value of labor might not be altered in spite 
of the increase of the price of the finished product. 



RATE OF WAGES 237 

223. Demand and supply prices of labor. — Although 
the rate of wages paid to all employees need not be at 
the minimum rate, the demand price of labor will follow 
in its fluctuations the marginal value of labor and will, 
in general, approximate it. The demand price of all the 
labor in a factory cannot exceed the total value of all the 
labor, and that total value cannot be ascertained except 
by the process of estimating the value of the labor of the 
last and least efficient worker in each particular group. 

Thus, if there were no trade union regulation impos- 
ing uniformity of wages, there would still be a tendency 
to uniformity — at all events among new employees — 
because of the estimate which the employer places upon 
the value of the labor of the last increment which he 
adds to his labor force. 

The demand price of labor is thus that amount which 
will be just worth the while of the employer to pay to 
the last man whom it is worth while to employ in a 
particular kind of labor, and in the then condition of 
the market. The supply price of labor is the price 
which, from their point of view, the laborers fix as their 
estimate of the value of their labor, and, so far as this 
supply price is coincident with the demand price, labor 
will hire itself and be hired. When the supply price 
rises because of the scarcity of laborers or otherwise, 
the demand price may or may not rise, because the value 
of the labor may or may not have risen; but if the de- 
mand price rises, it will, of course, draw up the supply 
price after it. Although all wages are not at the mar- 
gin, the competition of wage earners seeking employ- 
ment, whenever such competition is effective, will tend 
to equalize wages in any particular industry; and the 
competition of employers for labor, where this is effec- 
tive, will have the same result in all industries, subject 



238 ECONOMICS 

to the qualifications of competition formerly mentioned. 

The rate of wages appears thus to depend upon the 
productivity of labor; but this productivity will depend 
in turn upon the value of the services of labor as esti- 
mated in the labor market, reacted upon, as this market 
is, by the market for commodities. The rate of wages 
is determined by means of a bargain between the em- 
ployer and the wage earner; but the terais upon which 
this bargain is made, depend upon the conditions which 
have been described. 

224. Labor reserves. — The above theory of the de- 
termination of wages rests upon the assumption of free 
competition between laborer and laborer for employment 
and between employer and employer for laborers. Cer- 
tain qualifications must be made upon this assumption. 

Competition is not always pervasive. Wherever the 
laborer can place a reserve price upon his labor and can 
work or refrain from working, he is in the position of 
withdrawing from competition with fellow applicants 
for a wage earning position if he choose to do so. This 
reserve may either be possessed by himself, in which 
case he is to that extent a capitalist, or the reserve may 
exist in the form of another kind of occupation to which 
it is possible for him, on occasion, to turn. 

The occupation of independent prospector, which in- 
volves the existence of such a reserve, was resorted to 
in British Columbia to such an extent that in 1896 and 
1897 it was exceedingly difiicult to procure miners, and 
they could not be procured for a lower rate than the 
lowest rate at which a prospector might be "grubstaked" 
or supplied with the means of life by a speculator. 
Similarly, the existence of available homestead lands 
in the northwest of Canada, which may be taken up 
on very slender capital, acts as a reserve in respect to 



RATE OF WAGES ^39 

wages, especially in the neighborhood of the homestead 
lands. A laborer will not work for anyone else for less 
than he thinks he could make for himself, if he were 
working upon his own land obtained gratuitously. 

Another example of the same condition is the prac- 
tice, common in the northwest of Canada, of home- 
steaders hiring themselves out for railway construction 
or for work upon farms other than their own. These 
men clearly have a reserve price upon their labor. A 
case of this kind in connection with railway construction 
in western Canada, in which a group of some five hun- 
dred homesteaders were concerned, resulted in a bargain 
in respect to a sub-contract being made between them 
and the contractor for the section which passed through 
their land. This bargain left the contractor no profit 
whatever. The homesteaders knew that they had to be 
employed; they were indifferent whether they were em- 
ployed or not, and they, therefore, obtained the maxi- 
mum price for their labor — obtained, in fact, the whole 
of the value of the product, so far as the contractor was 
concerned. 

225. Eifect of population. — While the laborer is in 
a chronic condition of urgency as a seller of labor, there 
are occasions when the demand for labor is such that 
there is a very small surplus of unemployed laborers. 
Wages under these circumstances tend to advance. On 
the other hand, the existence of a large reserve of un- 
employed laborers depresses wages and contributes to 
spasmodic employment. Thus, when the population of 
a country is growing rapidly, and when, therefore, the 
labor market is continually subjected to fresh acces- 
sions, the reserve of labor increases, unless the demand 
for labor for industrial enterprises increases in the same 
relative degree as the population. 



240 ECONOMICS 

If, owing to the increase of population, the reserve of 
labor increases, wages will not necessarily fall, notwith- 
standing the increase of population, nor will wages rise 
in consequence of a diminution of population, unless the 
demand for labor varies. 

Wages may also rise or fall from causes altogether 
apart from movements of population. In Great Britain 
wages advanced with great rapidity in the years be- 
tween 1870 and 1874 although the population was in- 
creasing at its normal rate. Germany has witnessed, 
during recent years, a remarkable growth of population 
simultaneously with an advance of wages. 

Mere scantiness of population does not imply high 
wages, otherwise wages would be higher in the rui'al 
districts than in the towns, which is contrary to the fact. 
Nor does mere density of population necessarily imply 
low wages. Wages, therefore, may be said to depend 
upon the relation between the supply of and the demand 
for labor at a particular time and place ; and the amount 
of supply will depend upon the population in general, 
primarily, but secondarily upon the reserve of labor or 
the amount of labor seeking employment. The de- 
mand for labor will emerge from the conditions pro- 
duced by the numerous causes which have already been 
detailed as influencing the fluctuations of prices. The 
amount of the reserve of labor, or the available supply, 
will depend primarily upon the economic position of the 
people, and secondarily upon the influence of demand. 

226. Other influences on labor reserves. — In a coun- 
try where free grants of land are available and are 
susceptible of cultivation with little or no capital, the 
reserve of labor will consist of those who are unfitted 
for or who are reluctant to undertake the labor of agri- 
culture. If there are relatively few of these, or if there 



RATE OF WAGES 241 

are none of them and there is no reserve, wages will de- 
pend almost exclusively upon the state of demand for 
labor for industrial purposes. If such demand is urgent, 
wages will be high. 

In new countries this may be said to be a usual con- 
dition. There the reserve is low because agriculture and 
other extractive industries offer advantages which com- 
pete with those offered by industrial employment. 

There is another case in which wages may be regarded 
as high. Such, for example, is the case of Iceland, 
where there is no industrial development and where the 
people are wholly occupied in attending to their own 
farms. There is no reserve of labor and no organized 
demand for it for industrial purposes. To induce an 
Icelander, therefore, to leave his customary occupation 
for personal service or the like, requires an offer of wages 
relatively high when the course of prices in the island 
is considered. Thus the rate of daily wages for a guide, 
for instance, amounts to about the equivalent of the 
value of three sheep. 

If there is no customary demand for labor, or if this 
demand is small, there will be no inducement for the 
presence of a reserve of labor seeking employment and, 
therefore, local wages will be high. 

It is true that the rate of wages is either customary 
or is the result of an individual or collective bargain; 
but the conditions under which this bargain is made must 
determine the character of it. If the competition be- 
tween workers seeking employment is keen, the ad- 
vantage in the bargain will, other things being equal, 
lie on the side of the employer. If competition among 
employers is keen, other things being equal, the ad- 
vantage will lie on the side of the workers. 

227. Minimum and maximum wages. — There is, how- 
c— I— 16 



24^ ECONOMICS 

ever, a superior limit above which, under normal con- 
ditions, wages cannot rise. This limit is determined by 
the necessity of maintaining the reserves of capital for 
the continuity of production. And there is an inferior 
limit of wages which is determined by a similar condi- 
tion, applied to the reserves of labor. The difference 
between the highest possible amount which may be paid 
in wages, and yet continue the production in the then 
state of the market for land and for capital, and the 
lowest possible amount which may be paid in wages, and 
yet continue the supply of labor necessary for produc- 
tion in the then state of demand in the market for goods, 
constitutes the range within which disputes about 
wages can take place. It is the interest of the workers 
to obtain as much of this margin as they can, it is the 
interest of employers to retain as much of it as they 
can. In both cases continuity — in one case, of employ- 
ment, and in the other case, of production — lies in the 
background as an indispensable condition. 

It is clear that the aggregate amount of this margin 
will depend upon the productivity of productive enter- 
prises taken in the mass. If, for any reason, the pro- 
ductivity is inferior, as in the case of an inferior harvest, 
there will be less to distribute than if the productivity 
were high, as in an abundant harvest. Moreover, if the 
product is small, there must be a more acute struggle 
over it than if the product is large. When industry is 
highly productive, when demand is brisk and the value 
of the product is being enhanced by advancing prices, 
there is less reluctance to increase wages than there is 
to maintain them when prices are falling. 

From the social point of view it is, then, important 
that production should be as great as possible — not in 
any individual products but in due proportions — ^in such 



RATE OF WAGES 243 

a manner as to supply the largest aggregate of utilities ; 
in order that, on the one hand, the productive process 
may be continued smoothly and that, on the other, those 
who contribute to it should be enabled to continue at 
their maximum efficiency. 

228. Labor not sole determining factor in value of 
product. — While all products are the products of labor, 
the value of the products is not due to that fact. I may 
spend a month in making an object which I regard as 
of high utility and to which I therefore attach a high 
value; but I may be wholly unable to find anyone who 
agrees with me either about its utility or its value. This 
is especially obvious in the case of works of art, about 
the value of which the widest difference of opinion fre- 
quently exists. Nor does their value, as determined by 
connoisseurs or as discovered at their sale by auction 
under conditions of competition, depend upon the 
amount of labor which their production has involved. 
A picture by Kaphael fetches a high price in the mar- 
ket, not because Raphael labored upon it for so many 
days, a detail which cannot possibly be known, nor 
merely because the paintings by Raphael are few and 
cannot be increased in number, nor merely because of 
the high artistic excellence of the example in question, 
nor because Raphael was one of the great figures of the 
Renaissance ; but because for these or, perhaps, for quite 
other reasons, many private collectors and the directors 
of many public museums who have the means to gratify 
their tastes, desire to add a picture by Raphael to their 
collections. 

Innumerable painters whose skill was probably not 
greatly inferior to Raphael's and who, perhaps, labored 
infinitely longer upon their works than he did, have been 
totally forgotten and their works have been lost be- 



244 ECONOMICS 

cause the generation to which they belonged did not 
value them or think them worth preserving. There are, 
no doubt, at the present moment unknown geniuses 
whose works, worth next to nothing in the market now, 
will be hotly competed for by excited connoisseurs when 
some day a critic in whose judgment they have confidence 
pronounces a favorable opinion upon them. It will then 
be a question to whom the value is to be credited — to the 
artist or to the critic. 

229. Why distribution is not based upon product. — 
That the laborer adds value to the product upon which 
he labors is, in the normal case, although not in all cases, 
true; but what the amount of that value is, is not de- 
termined and cannot be determined until the product 
passes into the market where it is eventually valued and 
sold, and even when this takes place, the value which is 
determined is the value of the commodity as a whole; 
the increments of value are not indicated. In those cases 
in which the production occupies a long time and in 
which the labor of many hands is employed as in build- 
ing an ocean liner, for example, the value of the finished 
product as a whole affords no means for estimating the 
value contributed respectively by the designer, by the 
miner who took the iron ore from the face of the mine, 
by the railway men who transported it, by the workers 
at the furnace in which it w^as reduced, by those at the 
steel rolling mills where the steel was rolled into plates, 
by the rivetters who rivetted it into the form of a ship, 
by the carpenters and other artificers who completed 
the vessel. 

Clearly an equal division of the proceeds among these 
various persons, some of whom contributed much and 
some little to the total result, would not necessarily be 
just; even if every one of them could wait for a year or 



RATE OF WAGES 245 

more for the payment of their quota, and even if there 
were no other claimants for a share of the proceeds of 
the joint labor. Moreover, the value of the vessel does 
not depend exclusively upon the circumstance that a 
large number of persons labored in the production of it, 
but depends very largely upon the circumstance that 
a large number of persons desire to use the vessel when 
it is produced. 

Thus, even if the laborers had free access to the means 
of production and if the raw materials out of which the 
vessel was constructed, and the tools which were used 
in construction were gratuitously placed at their dis- 
posal, some means would still have to be devised of main- 
taining the laborers while the vessel was being con- 
structed. Clearly the vessel would not acquire its full 
value until it was completed, nor could the value be 
fully realized until years afterwards, 

230. Supporting labor dwing period of production. 
— If a community whose economic system was character- 
ized by thoroughgoing communism, attempted an opera- 
tion of the kind suggested, it would be necessary for it 
to have previously accumulated a stock of food and 
clothing sufficient to subsist all those of its members 
who were engaged in the various and prolonged labors 
necessary for the construction of the vessel during the 
whole of the period which elapsed from the beginning to 
the end of that construction. In other words, they would 
have had to accumulate capital, because the means by 
which the various workers are subsisted during the op- 
eration constitute the capital involved in it. The vessel, 
when it was completed, might be utilized by the com- 
munist community or it might be sold. If it were util- 
ized by the community the net saving of the hire of 
other means of transportation, whatever that might 



246 ECONOMICS 

amount to, would gradually enable the community to 
replace the capital expended upon the vessel and would 
thus enable it to undertake another similar enterprise 
and so on. The essential point is that, before the enter- 
prise was entered upon, it would be necessary to possess 
the means of subsistence for the workers upon it, or it 
would be necessary, while it was in progress, for the 
other members of the community to support those who 
were engaged in the enterprise. 

The city of St. Petersburg was built in precisely this 
manner, not by a communist society but by enormous 
numbers of state peasants who were required by Peter 
the Great to cut the timber in the forests, to bring it 
to the site chosen for the city, and to drive the piles 
upon which the city was subsequently built. While they 
were doing so, the peasants could not cultivate their 
lands and obtain subsistence, therefore thousands of 
other State Peasants were required to bring wheat and 
rye for their support. 

231. Voluntary association. — Co-operation of this 
kind may be organized by a communist society such as 
we have supposed, or by means of forced labor as in the 
illustration, or b}^ means of the voluntary association of 
numerous persons. A communist society is held to- 
gether either by a high social ideal, or by some kind of 
force, moral or material ; forced labor of enormous num- 
bers of peasants is only possible under conditions of per- 
sonal bondage ; voluntary association is the usual means 
by which large enterprises of the kind suggested are 
organized. 

But there must be some motive for the voluntary as- 
sociation. This motive is usually the pursuit of indi- 
vidual gain. Desire to make a living, together with 
avarice, appear to be sufficient to bring together at the 



RATE OF WAGES 247 

call of some person or group of persons, those who will 
be willing to render the various services necessary. In- 
stead of waiting for problematical incomes from the fin- 
ished vessel when it enters into the service for which it 
is destined, those who co-operate are willing to compound 
day by day or week by week for their share of the even- 
tual product. 

232. Advantages of modern system. — This system of 
compounding gives them a certain freedom. They can 
leave off working when they please, unless they are 
bound by agreement. They are not in the position of 
communists who must either remain members of their 
groups or forfeit their share of the accumulations made 
by the group and by them as members of it; nor are 
they in the position of serfs who must work at the call 
of their owner. They are free hired laborers, or they 
are owners of raw materials, or they are owners of liquid 
capital capable of being transmitted into any one of 
many required forms. 

Modern industrial organization has many disadvan- 
tages; but one of its advantages is its voluntary char- 
acter. Those who engage in it are, compared with those 
who engage in other known methods of organization, in 
the enjoyment of greater freedom. The essential fea- 
ture of this organization is the voluntary supply of capi- 
tal, on the one hand, and of labor on the other. Capital 
has no inherent power to compel the laborer to work; 
nor has the laborer any inherent power by means of a 
general strike or otherwise to compel the capitalist to 
supply industrial capital. 



CHAPTER V 

PRACTICAL LABOR PROBLEMS 

233. Labor combinations. — Combinations of laborers 
for the purpose of collectively making demands upon 
their employers for improved conditions of labor, for 
higher wages or for resisting reductions of wages, are 
not new phenomena. Strikes and mass fights of labor- 
ers are known to have occurred in almost all ages. 

The trade union, is however, an organization which 
dates not earlier than about the end of the eighteenth 
century. Even then it was upon a very small scale. 
Small local unions in individual trades were formed 
more or less surreptitiously. In the beginning of the 
nineteenth century such unions were found to be formed 
for "restraint of trade" and were, therefore, forbidden. 
From about 1830 several large general unions of all 
trades were formed successively, and some of them as- 
sumed considerable proportions. 

It was not, however, until the third quarter of the 
nineteenth century when trade unions were permitted 
to register themselves in Great Britain as Friendly So- 
cieties that they were in any sense recognized as having 
a legal existence. From that time onward, the trade 
union has played a large role in labor politics, especially 
in Great Britain, where the proportion of working men 
who belong to trade unions is much larger than it is in 

248 



PRACTICAL LABOR PROBLEMS 249 

any other country. Indeed, except in the British Em- 
pire and in the United States, trade unionism in the 
EngHsh sense can hardly be said to exist. 

There are, however, on the continent somewhat ana- 
logous bodies. These organizations are rarely purely 
trade organizations. They have generally as an impor- 
tant reason for existence, the promotion of some political 
propaganda although they have also certain economic 
characteristics. Because of their political aspects such 
organizations have generally, although not invariably, 
been discouraged and their activities have even been 
arrested by continental governments. 

Soon after acquiring in some measure a legal status, 
trade unions in Great Britain began to promote the 
candidacy of some of their own number as members of 
Parliament, and they began to develop a Parliamentary 
policy. This policy related chiefly to the .regulation of 
certain dangerous industries, such as mining, to the fac- 
tory acts and the like. The trade union movement in 
the middle of the seventies of the nineteenth century was 
confined to a few of the leading trades and the union 
leaders in these trades determined the policy of the move- 
ment. 

234. Change in trade union control. — The first serious 
invasion of their position occurred through the admis- 
sion in 1876 of about a hundred thousand agricultural 
laborers into the Trade Union Congress. This invasion 
was followed in 1889 by the similar admission of the 
dock laborers. The second of these invasions marks a 
new epoch in Trade Unionism. 

The admission of a union composed of casual laborers 
indicated a great change. The new recruits were repre- 
sented by a group of remarkable men. Some of them 
were natural orators and all of them were enthusiastic 



250 ECONOMICS 

socialists of one or other of the numerous types of the 
socialists of that period. The influence of the older type 
of trade union officials then began to decline. But the 
full meaning of that decline did not make its appearance 
until 1911, when what amounted to a general strike was 
declared in spite of discountenance of the movement by 
the trade union officials. This event was indeed almost 
as much a strike against them as it was against em- 
ployers. 

Although it was evident that the syndicalist move- 
ment (see page 254) which had been developed in 
France and Italy had had some effect upon British 
Trade Unionism, the strike passed without any material 
resort to violence. It meant, however, the practical pass- 
ing of the control of the labor movement in Great Brit- 
ain out of the hands of the older group of trade miion 
members of Parliament. 

The so-called Labor Party cannot be held as yet to 
form a homogeneous group; and its influence upon the 
movement is by no means a dominant factor. The labor 
movement as a whole is undoubtedly still largely in- 
fluenced in Great Britain and to a problematical extent 
in the United States by the powerful unions of the larger 
trades — the engineers, the unions of miners, railway ser- 
vants and the like, and these in general adhere to the 
older methods. They have large funds and are not 
usually in favor of strikes, excepting as a last resort. 
Recent legal decisions which have rendered the funds of 
the large unions liable to attachment, have had the effect 
of diminishing the prestage of the more wealthy and 
conservative unions and of thus contributing to the more 
unstable and aggressive syndicalism. 

It would appear, however, that the strike, especially 
the General Strike, or simultaneous strikes of many 



PRACTICAL LABOR PROBLEMS 251 

trades, does not inspire the confidence in its success as 
a weapon, which at one time it inspired. Trade Union- 
ism in Great Britain may thus be said to have passed 
through one of the phases of its historj^ without as yet 
having given any decisive indication of the character of 
the next phase. This delay may probably be attributed 
to the fact that during a period of extraordinary activity 
in manufacturing industry, trade unionism and labor 
agitation are in general quiescent. It may be expected 
that the next industrial crisis will exhibit some fresh 
features. 

235. Strikes. — The trade union may be regarded as 
representing an important and useful phase of the la- 
bor movement. The habit of organization and the nec- 
essity of subjecting individual interests to the interest 
of the group have had important moral effects; the 
economic effects are less certain. 

The trade union to a limited extent, by limiting the 
number of apprentices and by means of strikes, may 
enable its members to place a reserve price upon their 
labor. If the employer does not agree to terms pro- 
posed by or in the interests of his workmen, and if the 
branch of handicraft to which they belong is organized 
in a trade union, a strike may occur. During the strike 
the unemployed workmen receive strike pay which is 
usually one-half or less than one-half of their normal 
wages. 

If the finances of the union admit of a long stiniggle 
and if the spirit of the strikers is such that a long strug- 
gle can be maintained, the men will probably gain their 
point and will receive an increase in wages. They will 
only do so in general, however, if the conditions of the 
industry warrant an increase, and they will not do so if 
there has been overproduction of their product and if 



252 ECONOMICS 

manufacturers have large stocks of which they are de- 
sirous of disposing. 

In any case, the strikers will have depleted or ex- 
hausted the funds of their union and, perhaps, comprom- 
ised the solvency of their sick and funeral benefit funds 
and the like. 

236. Strike failures. — While strikes are sometimes in- 
evitable, they are always very costly, both directly and 
indirectly to the workers themselves. Under favorable 
conditions, when demand for labor is active, the pres- 
sure of a united demand, supported by the influence of a 
large union, may undoubtedly hasten or even occas- 
ionally force an advance; but in a falling market, when 
demand is slack and the warehouses are overstocked, a 
strike for higher wages or for the purpose of resisting a 
reduction occasioned by the exigencies of trade, is gen- 
erally a failure. So also, strikes which occur at too fre- 
quent intervals are in general failures because the finan- 
cial strain of a strike is too great for frequent recurrence 
and because the nervous strain of an important strike 
is sometimes great enough to kill the leaders on either 
or both sides. 

237. Collective bargaining. — Individual bargaining 
between workmen and employers has been practically 
replaced by collective bargaining in most of those trades 
whose members are organized in stable trade unions. 
Prior to the drawing up of a collective bargain, how- 
ever, it is almost, although not quite, indispensable for 
"he employer to recognize the union. This has often 
./cen done with great reluctance because recognition of 
the union means discussion of the rates of wages payable 
to employees with third parties — the officials of the 
union to which the men belong. 

Many strikes have taken place having for their ob- 



PRACTICAL LABOR PROBLEMS 253 

ject the recognition of the union with the ulterior object 
of collective bargaining. For a collective bargain to 
be advantageous to the v^orkers, however, it is necessary 
to have in the background an amount of trade union 
funds sufficient to enable the workers to place a reserve 
price upon their labor. In any case, collective bargain- 
ing implies uniform wages, and contributes to the 
strength of the trade unions, although it does not alto- 
gether either prevent disputes or eliminate competition. 
"The Industrial Workers of the World," an organiza- 
tion which appears to be gaining strength, will not enter 
into agreements. 

238. Economic effects of trade unionism. — The wage- 
earner, by means of insurance against unemployment in 
a trade union in a state insurance scheme, or otherwise, 
may provide a means of withdrawing himself tempor- 
arily from the competitive labor market. The influence 
of the trade union in diminishing competition by per- 
suading or forcing workmen, whether or not they are 
members of the union, to refrain from offering them- 
selves in competition and in maintaining them for a time 
while they are excluded from employment, is sometimes 
effective in reducing the local supply in the labor market. 
When this is done successfully, production is restricted, 
the stocks of manufacturers and others are depleted and 
prices are advanced. Advances in wages usually fol- 
low unless in the meanwhile the supply price of labor 
or the price of the product has fallen. 

A strike of workmen diminishes the consumption of 
goods customarily consumed by them, although it also 
diminishes the production of the goods they produce. 
The diminution of demand is temporary but the net 
effect will depend upon the magnitude and the character 
of the dispute. A strike of bakers would produce in- 



254 ECONOMICS 

finitely more widespread and serious effects than a strike 
of tailors. 

The policy of restricted output is sometimes adopted, 
the men refusing to work for more than three days a 
week, for example, in order that the restricted output 
may permit accumulated stocks to be sold and that thus 
the way may be prepared for a demand for increased 
wages. 

When workmen are scarce and the supply prices of 
labor are high, the supply prices of the commodities 
produced by them will be high also ; but each increase in 
the supply price checks demand. Either the supply 
price will have to be reduced or the production, and, 
therefore, the employment will have to be diminished. 
The results of increased wages under such conditions 
would be either negative so far as prices are concerned, 
in which case the increase in wages would have to be 
paid out of profits, or positive in which case the increase 
would be paid by the consumer, while fewer workmen 
would be employed owing to the reduced demand. 

239. Trade Unionism in the United States. — In the 
United States trade unionism has passed through phases 
of character similar to those through which unionism 
has passed in Great Britain. Local unions and local 
groups of unions were first formed and then wider na- 
tional unions of particular trades or groups of trades; 
then the American Federation of Labor corresponding 
to the Trades Congress in Great Britain. The same 
conflict of jurisdiction between unions also followed and 
there has recently emerged the same doubt and suspicion 
of the officialism of the unions, the outcome of which 
has been a syndicalist wing of the labor movement repre- 
sented by the Industrial Workers of the World. This 
latter movement has not yet attained any formidable 



PRACTICAL LABOR PROBLEMS ^55 

numerical proportions, but it has developed great activity 
and great organizing ability, especially in the Pacific 
States and to some extent in the East and South. The 
most aggressive syndicalism has made its appearance 
in the mining and lumbering industries. Its aim ap- 
pears to be to form one universal union. Instead of 
adopting a hostile attitude to Asiatic labor it has sought 
to enlist both Chinese and Japanese in its ranks. The 
purpose of this union appears to be a determined strug- 
gle against capitalism in the United States. 

The development of trade unionism in the United 
States has undoubtedly been influenced by the fact that 
a very large proportion of the wage-earners in the great 
industries — in mining and in the steel and textile in- 
dustries — consists of comparatively recent immigrants 
from Southern and Eastern Europe. These workmen, 
largely unskilled, are not only unaccustomed to trade 
union organization but are imperfectly acquainted or 
even ignorant of the English language. Any given 
group of them, also, is diversified in racial origin. The 
wages which they are able to secure without the aid of 
any trade union are much higher, both nominally and 
really, than the wages to which they have been accus- 
tomed. Many of them contrive to save what for them 
are considerable sums of money. 

Trade union organization is thus very difficult. In 
some cases unions have trained and employed as speak- 
ers and agitators Italians, Greeks, Bulgarians and 
others with the object of utilizing them as trade union 
organizers among their respective compatriots. 

240. Trade unionism in Canada. — Trade unionism in 
Canada owes its origin partly to the creation of branches 
of unions having their headquarters in the United States 
and Great Britain and partly to the formation of local 



^56 ECONOMICS 

unions by immigrants from Great Britain. The com- 
paratively rapid development of industry, and the scanti- 
ness of population, together with the existence of free 
land, have rendered the conditions of labor so favorable 
and the rate of wages so high that the advantages of 
unionism have been less obvious than otherwise they 
might have been. The maintenance of some of the 
unions has thus been difficult and there have been many 
fluctuations both in the local bodies and in the national 
organizations. International unions play a large role 
because there is much coming and going of workmen 
across the line. 

241. International trade unions. — So large a propor- 
tion of the total wage-earning population in the United 
States and Canada is employed in agriculture, and the 
organization of agricultural unions on any large scale 
never having been effected in either country, the num- 
ber of trade unionists in America is, relatively to the 
total number of employed persons, much smaller than 
is the case on the continent of Europe and in Great 
Britain. 

The fact, how^ever, that the important unions are inter- 
national and that there is thus a very close association 
between the wage earners of the two countries, con- 
tributes an element of power to American unionism 
which does not exist in unionism in Europe. This ele- 
ment of power is also undoubtedly an element of danger. 
In order to promote the interests of labor in the United 
States, it may be expedient to incite labor disputes in 
Canada. 

Difficulties arise in cases where trade union officials 
from the United States present themselves to employers 
in Canada to negotiate the wages of the members of their 
unions. Occasionally the question of the recognition 



PRACTICAL LABOR PROBLEMS 257 

of the union has been compromised by its international 
character. National unions have sometimes been fos- 
tered by employers as an offset to international unions. 

242. ^'Closedf' and ''open shopf'— In certain indus- 
tries the trade union is strong enough to insist upon the 
fixation of a label to a commodity to indicate that it is 
made by union labor. Some of the unions are also strong 
enough to insist upon the exclusive employment of mem- 
bers of trade unions. A factory where only trade union 
members are employed is known as a "closed shop." 
One in which any one may be employed whether he is 
a member of a trade union or not, is known as an "open 
shop." There are a few industries both in Canada and 
in the United States where trade union members are 
excluded from employment. 

243. Woman's labor. — The determination of the 
wages of women has long been looked upon as depending 
upon factors different from those which determine the 
wages of men. The chief reason for this is that, as a rule, 
women are not entirely self-sustaining. In the textile 
manufacturing trades, in clothing manufacture, in the 
canneries, and in confectionary works, for example, 
where women are extensively employed, the workers not 
exclusively, but largely, live in the houses of their par- 
ents who also work in the same or in other factories. 
The wages of the women go to increase an already exist- 
ing family income. Thus, so large a number of women 
can afford to take a wage less than they would require 
to have, to enable them to live independently, that their 
attitude in making a wage bargain, influences the bar- 
gains made by all other women. 

The arguments for the public regulation of the wages 
of women are thus stronger than those for the regulation 
of those of men. It is obvious that a rule which would 
c— I— 17 



258 ECONOMICS 

require the equal payment of men and women in like 
employment might result in the employment of men 
rather than women in those occupations which are open 
to both sexes. In the teaching profession, for example, 
if the salaries of men and women were the same, men 
would in most cases be employed by preference. The 
reasons for the preference are that once having entered it 
men, as a rule, remain in the profession, while women 
do not, and that in general the discipline of men is 
regarded as being superior to that of women. In the 
lower grade schools, however, where the supervision of 
children is concerned, women teachers are frequently the 
better disciplinarians. In some occupations of the higher 
kind, where competition is restricted, the salaries of men 
and women of similar qualifications are alike. 

244. Volii7itary 7mnimum wages. — In many unskilled 
trades, especially those in which women and girls are 
largely employed, employers have found it advantageous 
to establish a fixed minimum wage. Under this system 
candidates for employment are taken on probation for 
a short period at the minimum rate. If their work 
reaches a certain standard, the standard being based 
upon a piece work rate, they retain their positions; if 
it does not, they are discharged. 

Since a certain proportion of those who are appointed 
on probation do not attain the required standard, the 
system must have one or other of two consequences, 
either the deficiency of those who fall short of the stand- 
ard must be met out of deduction from the wages of 
the gainful workers; or it must be regarded by the em- 
ployer as a premium of insurance against public criti- 
cism of his business on the ground that he i)ays wages 
which are inadequate for subsistence. 

In a large, well-organized and generally profitable 



PRACTICAL LABOR PROBLEMS 259 

business, this system may be carried on continuously with 
advantage, but the employer on the margin will find it 
difficult to pay the premium involved in the system. 
Should he adopt the system of a fixed minimum the 
average wage of his worker will probably be lower than 
it might otherwise be. 

Even in a trade such as garment-making, the skill of 
workers varies enormously. In one case known to the 
writer two girls, one a fresh recruit and the other an 
experienced hand, were working side by side in a gar- 
ment factory. The most assiduous toil of the recruit 
yielded at the end of her first week $1.98, Avhile the 
labor of the experienced girl who probably exerted less 
effort yielded at the same piece-work rate $6, or more 
than three times as much. In the second week the re- 
cruit made a little more, but she despaired of attaining 
the proficiency of her fellow worker, nor did she succeed 
until several weeks had elapsed in making even a living 
wage. 

Under some conditions the minimum wage may be 
regarded as an advantage. It throws the cost of the 
education of the worker directly upon the employer, 
although the incidence of the cost will be likely event- 
ually to fall upon the workers as a whole. It would 
appear that there might be adopted a system of tech- 
nical education by means of which the technique of 
I certain trades in which large numbers of working people 
1 are employed, might be imparted at a minimum of cost to 
those who intend to enter such trades ; but even a system 
1 of this kind would not be likely to meet the case of those 
( who drop into inferior employment, like garment mak- 
i ing, for instance, and who have neither time nor means 
I to enable them to take advantage of educational facili- 
ties. They must work for wages without delay. For 



260 ECONOMICS 

such workers the minimum wage Is a real advantage 
even if subsequently the deficiency of their recruit stage 
is met by deduction from their subsequent wages. 

245. Statutory mmimurn "adages. — The case of volun- 
tary minimum wages has been discussed above. The 
case of statutory minimum wages depends upon some- 
what similar conditions. The statutory minimum wage 
apparentl}^ fixes a reserve price for labor, but it does 
not enable the applicant for employment to live should 
he not be able to secure employment at the minimum. 
Employers may by means of intimate inspection of the 
conduct of their business be prevented from paying less 
than a certain amount; but they cannot be compelled to 
employ workers, the product of whose labor is not equal 
to that amount. 

A statutory minimum wage would, therefore, require 
to be supplemented by some system by which those who 
were unable to obtain employment at the minimum wage 
would be supported by the State. The higher the mini- 
mum the larger would be the number of workers which 
would be excluded from employment in the field of gen- 
ei-al industry and the strain of the maintenance of those 
who were excluded might become very great. A mu- 
nicipality may fix as a minimum for all persons em- 
ployed in any capacity in its service a wage of $2 per 
day, on the ground that this amount represents the mini- 
mum of subsistence. If, during a period of industrial 
depression, the city is inundated with applications for 
employment at this wage, it may be advisable to extend 
its pay roll in order to provide employment for these 
applicants. The new workers may be set to some civic 
improvement or to some other kind of employment for 
which labor of an inferior or non-specialized sort may 



PRACTICAL LABOR PROBLEMS 261 

be serviceable; but there is an inevitable limit to such 
employment. 

If the municipal authorities decide to expend a specific 
sum upon such work, bearing some proportion to the 
total expenditure of the year, it will be possible to em- 
ploy at the fixed minimum only a certain number of 
persons, and other means of relief will require to be 
provided for the other applicants. Meanwhile, however, 
the attraction of a fixed minimum will have drawn into 
the city from the rural districts and from other cities 
where there is no fixed minimum, more applicants for 
employment ; with the consequence that local charity will 
be overtaxed, while those districts in which no fixed 
minimum exists will be relieved of pressure upon their 
charities. 

This illustration is taken from the city of Toronto, 
which every winter is subjected to an invasion of unem- 
ployed workmen, some of whom leave other centers on 
account of the fixed Toronto minimum and others on 
account of the numerous charities in the city. 

If, however, a municipal minimum wage results in 
drawing to the city which imposes it a larger number 
of applicants for employment than would otherwise have 
gone there, it is clear that, other things being equal, the 
imposition of a municipal minimum wage will tend to 
depress the labor market by an over supply of labor and, 
therefore, to reduce wages in general industry. Even 
if the city were able to employ a large number of the 
applicants it could not do so in indoor employments be- 
cause it has no organization for industries of an indoor 
character. The city employment would be wholly out of 
doors and rather than endure the discomfort of winter 
work in the streets the fresh applicant for employment 
would accept even lower wages for indoor employment. 



262 ECONOMICS 

246. Statutory jnaocimum wages. — The fixation of a 
maximum wage was a very usual municipal act during 
the earlier ages of free hired labor. When such laborers 
were few and when the demand for them in the industrial 
towns was increasing, their demands for higher wages 
became insistent and these demands were sometimes ac- 
companied by much turbulence. This condition was 
very usual after any serious epidemic in which the num- 
bers of laborers in a city were suddenly reduced while 
the external demand remained unaltered. The plagues 
in the fourteenth century, which affected seriously the 
great commercial and industrial cities of northern Italy, 
for example, reduced the numbers of laborers so that 
wages advanced to a high point. 

The municipal authorities in several of the city re- 
publics endeavored to prevent the advance of wages by 
imposing a statutory maximum. On the other hand 
Venice, in general more shrewdly governed than any 
other city of her time, widely announced that no maxi- 
mum was imposed there, that on the contrary the highest 
wages would be paid. The result was an immediate 
migration of artisans and laborers to Venice, and owing 
to the competition of these for employment wages fell 
to a point below the maximum imposed by the other 
cities. 

The imposition of a maximum wage has a deterrent 
effect upon immigration of workers into the region af- 
fected and, therefore, a statutory maximum tends to be- 
come the uniform wage because the best workers will 
emigrate and only the inferior workers will remain. 

247. Conciliation and arbitration. — With a view to 
the mitigation of the struggle between capital and la- 
bor, arbitration in wage disputes was adopted at an 
early stage in the development of the mechanical in- 



PRACTICAL LABOR PROBLEMS 263 

dustries on a large scale. Wages, for example, in the 
cotton trade and in the coal and iron trade in Great 
Britain were fixed by boards of arbitration appointed 
jointly by the employers and the employees. In the 
trades mentioned, arbitration boards fixed the rates of 
wages periodically and in the North of England, so far 
as the iron and coal industries are concerned, and in 
the Manchester district, so far as the cotton industry is 
concerned, they have been successfully conducted for 
more than forty years. Government conciliation and 
arbitration boards have been appointed in New Zealand 
and a somewhat similar method has been adopted in 
Canada. Arbitration boards have from time to time 
been appointed in the United States, under State and 
Federal Acts, to deal with specific disputes. 

Where there is a difference of opinion as to the rate 
of wages, and where the difference concerns a compara- 
tivly small amount, arbitration or conciliation boards 
perform a useful function in effecting a compromise be- 
tween the parties ; but where the difference is upon some 
question of fundamental principle, such as the recogni- 
tion of a union, a compromise is impossible and arbi- 
tration is of little use. If a body of workmen refuse 
to work unless their union is recognized, and if the em- 
ployers refuse to recognize the union, no board of arbi- 
tration can settle a dispute of that kind because it cannot 
enforce its decision. The employers can only jneld to 
economic pressure; and the same is true of the work- 
men. 

. An employer who is' a contractor to the government 
may be forced to recognize a union or to increase the 
wages of his men by means of a threat that if he does 
not do so he will be awarded no more government con- 
tracts, or by threats of prosecution by the government 



264 ECONOMICS 

for alleged violation of the Trust Act, etc. If he yields, 
however, it will most probably be on the understanding 
that the increase of wage will be taken into account in 
the next contract. An arrangement of this kind results 
in the taxpayer paying the increase and not the con- 
tractor. There have been instances in the United States 
of strikes for increased wages by the employees of a 
government contractor and of the claims of the strikers 
being met after an arrangement by which the represen- 
tatives of strikers agreed to press for an increased price 
to be paid by the government to the contractor. In 
such cases, the strike is not really against the contractor 
but against the taxpayer. 

In the case of an employer who does not stand in the 
relation of a contractor or of a possible contractor to 
the govermnent, the latter has no direct power to force 
an increase of wages or to force employment, although 
indirectly it may exercise such a power. In no case 
has a government or a board of arbitration power to 
enforce a decision against the men. If the men refuse 
to accept the decision of the board, a strike or the con- 
tinuance of a strike already in existence is their only 
alternative. Unless it is presumed that the government 
has absolute power, it cannot send the men to j ail merely 
because they refuse to work. Under common or statute 
law they may be indicted for any violent act which they 
may commit but they canot be prosecuted for refrain- 
ing from labor. 

This formidable fact has rendered arbitration of no 
effect in frequent cases, in every country in which arbi- 
tration legislation has been in force. The policy of arbi- 
tration is nevertheless useful in those cases in which the 
dispute is about small differences in wages. In Canada 
and in the United States the question of arbitration is 



PRACTICAL LABOR PROBLEMS 265 

complicated by the existence of international trade 
unions. 

248. Trade unionism and economic theory. — The 
earlier phase of modern trade miionism was coincident 
with the development of a theory of labor which em- 
phasized the importance of the relation of the increase 
of population and the rate of wages. It was held that 
there was a tendency for population to outrun subsist- 
ence ; that is, that given increased production, population 
would speedily increase in such a manner as to absorb the 
increase. It was held, also, that it was for this reason 
impossible for the wage-earning class as a whole to in- 
crease wages except by increasing production ; but since 
an increase of production must necessarily bring more 
wage earners into the field, it was in the long run hope- 
less for the wage-earning class as a whole to improve 
its standard of comfort except by limiting its numbers. 
If one group of wage earners, by means of combina- 
tion or otherwise succeed in raising their wages nominal 
or real, other groups must suffer. 

While it has by no means been shown conclusively 
that combination has raised the wages of the workers 
considered as a whole, there can be no doubt that the 
standard of comfort of the mass of the people of the 
western races has risen during the past fifty years. To 
what circumstances is this rise in the standard of com- 
fort due? It would apear that it is due chiefly to two 
circumstances : first, to the invention of more economical 
methods of production, the product per labor unit be- 
ing greater ; and, second, to the fact that the population 
has not increased in proportion to the increase of pro- 
duction. An increased standard of comfort and the de- 
sire to increase this standard still further have in many 
countries, but most notably in the United States and in 



^ee ECONOMICS 

France, imposed a check upon the increase of popula- 
tion. To use the expression of Malthus, "The hare has 
been persuaded to go to sleep, and the tortoise has over- 
taken it." 

This is true of the most progressive races in the in- 
dustrial sense; but it is not true of two great and ex- 
tremely prolific races, viz, the Slavic and the Chinese. 
The growth of these two races appears to conform to the 
theory of population of the latter part of the eighteenth 
century. The struggle of the future may be between 
those races, on the one hand, and the Western races 
which are determined to maintain and to increase their 
standard of comfort at the expense of increase in num- 
bers, on the other hand. It is interesting to notice that, 
both in China and in Kussia, labor combinations of one 
type or another, have been in existence from a very 
ancient date, and that they have not been effective in 
maintaining any high level of comfort, although they 
have on occasion been effective in raising the rate of 
wages. 

Trade unionism, as distinguished from the more recent 
industrial unionism, among Western nations has, in the 
strict sense, accepted the system of employment which 
is usually called the capitalistic system. It has in gen- 
eral been opposed to systems of profit sharing and co- 
operation as well as to any system of state socialism. 
The fundamental reason for this hostility is, that under 
the existing system wages are certain, although employ- 
ment is not certain, while under the systems mentioned, 
employment might be certain but wages would be un- 
certain. 



CHAPTER VI 

CAPITAL AND INTEREST 

249. History of interest.— The organization of a pro- 
ductive enterprise involves, as we have seen, the pui'chase 
of capital for the purpose of procuring land, buildings, 
machinery and other necessary means, and for the pur- 
pose of meeting the current expenses until the returns 
from the productive process begin to come in. The need 
for capital gives rise to the problem of interest. This 
problem of interest is— how is the amount determined 
in the market and for what form of value is interest 
paid? 

The history of the numerous views about the nature 
of interest which have been advanced from time to time 
can be recited only briefly. In early ages, before what 
is known as capitalist industry assumed prominence, 
money was usually lent for purposes of consumption, 
rather than for production. Sometimes forced loans 
were exacted by governments or by nobles who were able 
to extort such " benevolences." For these, interest was 
not usually paid. Otherwise those who desired loans 
usually desired them for food, clothing and the like. To 
lend money for such purposes was looked upon as a 
Christian duty; and if interest was charged upon loans 
of this kind, the act was regarded as an exaction from 
the needy. The State and the Church alike, in general 

267 



268 ECONOMICS 

discountenanced and frequently forbade such transac- 
tions. 

The beginning of modern commerce, which may be 
said to have occurred in the sixteenth century, resulted 
in a change in views about interest. Many of the com- 
mercial adventures in which the merchants of that day 
engaged required capital to a greater extent than they 
themselves possessed, and they therefore borrowed it. 
Since the capital was intended to be productively em- 
ployed, no moral offence was observable in the merchant 
offering and in the owner of the capital receiving, when 
the sum was repaid at the stipulated period, a larger 
sum than that which had originally been transferred. 
The merchant had made a profit out of the capital in- 
volved in the loan, and it was neither unjust nor unrea- 
sonable that he should surrender some portion of his 
profit to the owner of the capital which had made the 
earning of the profit possible. 

250. Early theories of mterest. — This practice led to 
the ideas that interest was paid for the use of money, 
and that interest was due to the productiveness of cap- 
ital. The accumulation of capital in the latter 
eighteenth and early nineteenth century gave emphasis 
to another idea, viz., that capital was the result of saving 
and that interest was paid in return for the service of 
saving. The expression which came to be employed was 
am^biguous, interest was said to be the "reward" of 
saving. 

One of these expressions is now used as a defini- 
tion of interest, although each expressed a certain aspect 
of the truth. Capital was used and interest was paid; 
and to the individual lender the reward of his abstinence 
came to him in the form of interest from the people 
to whom he lent his money. Had he not abstained 



CAPITAL AND INTEREST 269 

from spending it, neither the money nor the interest 
would have been his. There are, however, many cases 
in which money is not lent for productive purposes and 
in which, nevertheless, interest is paid. IMoney may 
even be borrowed without being used in any sense and 
yet interest may be chargeable for it. Yet the mere 
abstinence from spending money will not of itself yield 
interest. The steward who hid his master's talent in a 
napkin saved it but was not rewarded by any increase. 

251. Current theory. — The current doctrine of inter- 
est is somewhat different. The problem of interest is 
really a part of the general problem of value. How do 
we estimate the value of things? This question has 
already been discussed. We have seen that we value 
things in respect to the urgency of our demand for 
them, in respect to their immediate or remote availabil- 
ity for the purpose of yielding their utility to us, and 
the like. The two points just mentioned are those which 
are chiefly operative when we consider a transaction 
relating to what is colloquially called a loan of money. 
If we urgently require money for any purpose, and 
if we have it in our power to obtain it, we are usually 
disposed to undertake to pay something for the sake of 
having it immediately. In other words, w^e consider an 
immediate sum of greater value to us than a remote 
one. We estimate that a sum of $100 payable today 
is, at least, as valuable to us as a sum of $105 payable 
a year hence, or we may regard the two sums as pre- 
cisely equivalent. "A bird in the hand is worth (is 
equivalent to) two in the bush." The difference in the 
two figures in the above illustration is $5 and this sum is 
interest. 

Thus, interest may be defined as the difference be- 
tween a sum payable now and a sum payable at a 



270 ECONOMICS 

future time ; the amount of this difference is the amount 
which it is necessary to add in order to produce equiva- 
lence between a present and a future sum. This theory 
of the mode in whch interest emerges is known as the 
agio theory because it regards interest as an agio which 
is added to product equivalence. The theory is stated 
in various terms by different writers, but in general it 
is accepted as the current doctrine of interest. 

252. Market rate of interest. — In the rate of interest, 
as determined in the market, there are discernible three 
elements: first, the agio as above described, or interest 
properly so called; seconds a premium of insurance 
against loss; and, thirds a commission or fee for the 
management of the transaction. All of these elements 
are variable. 

The amount of the first element or agio will depend 
upon the urgency of demand for immediately available 
capital, on the one hand, and upon its supply, on the 
other. The amount of the second element will depend 
upon the lender's estimate of the risk incurred in mak- 
ing a particular loan or in his estimate of the average 
risk he incurs in his business of lending money or in 
particular sections of it, and the third element will vary 
with the character of the loan and the character of the 
lender's business. 

253. Four divisions of money market. — The 
money market is customarily divided into what may 
be described as watertight compartments. In one of 
these compartments appear the sums destined by their 
owners for permanent investment in those securities 
which yield an annuity, which is not involved in uncer- 
tainty and therefore is held to involve no risk. The 
securities of the most stable governments are in this 
class. The principal investors are the governments ij 



CAPITAL AND INTEREST 271 

themselves for the sinldng funds connected with their 
debts, bankers and the trustees of pubhc and private 
institutions and of private estates. 

JS'ext to this section of the money market there comes 
the section in which there are funds destined for in- 
vestments in municipal securities together with high 
class railway bonds and stocks. Beneath these, there 
is the section in which there are the funds destined for 
investment at higher rates in less stable securities. 
Apart from the sections of the market for capital which 
contain the funds as above described, there is the sec- 
tion which contains the funds which are available for 
loan from day to day. This section may be described 
as the market for money, the other sections being prop- 
erly described as constituting the market for capital. 

Interest (both gross and net) may vary widely 
among these sections. Under certain conditions of the 
market for capital, a government may be unable to bor- 
row either on the security of its permanent or its tem- 
porary debt at a rate lower than 3 per cent, while 
at the same moment day to day loans may be made at 
a fraction of 1 per cent. So, also, under other con- 
ditions a government may be able to borrow at 3 per 
cent, while day to day loans are commanding 10 or 15 
per cent. Although the two divisions of the market are 
thus separated, they are nevertheless connected, because 
a large part of the funds waiting for investment in per- 
manent forms may temporarily be used for the purposes 
of day to day loans, and permanent securities may be 
employed for the purpose of raising money on day to day 
loans. 

A peculiarity of the day to day money market is that 
those who deal in money in this way are almost always 
more or less urgent sellers of money. Given adequate 



272 ECONOMICS 

security they must lend, even if they have themselves 
to borrow; otherwise they might as well give up their 
business. This is the reason of the extremely low rates 
for short periods which are occasionally to be obtained. 

The market rate of interest thus depends upon the 
amount of funds seeking employment in the particular 
section of the market in which a given demand finds 
its appropriate supply. It must be realized that low 
interest rates apply onty to large sums. Borrowing in 
detail resembles purchases in minute quantities, the cost 
of management which enters as an element into all loan 
transactions constitutes a large part of the gross in- 
terest in small loans, in large loans it constitutes a small 
part. 

254. Influence of monetary combinations. — Money 
is so widely diffused throughout the world that no at* 
tempts to monopolize it in any effective manner could 
possibly succeed. The competition of capital is per- 
haps more thorough than any other form of compe- 
tition. 

Yet scarcity of available capital may occur from 
many causes. The owners of caj)ital may be afraid of 
a financial crisis, and may be reluctant to allow their 
money to go out of their possession, so that although 
there ma}^ be an abundance of capital in existence, 
there is a scarcity of available capital. There may be 
a scarcity of capital in the centres of commerce because 
money has been drawn to the outskirts or has been 
diffused so widely that it cannot be obtained quickly 
for the purpose of satisfying some anticipated demand. 

Under these circumstances if a borrower goes into 
the market with an urgent demand for money, he may 
have to pay a very high rate. Many large industrial 
concerns require on occasion very large sums upon the 



CAPITAL AND INTEREST 273 

credit of their enterprises, and if their need happens 
at a moment when the funds are scarce in the market, 
they may have to pay a very high price for it. Thus, 
the Pennsylvania Railway required the considerable 
sum of $50,000,000 in 1906 and required it at once. 
The money was obtained in Paris and the rate includ- 
ing commissions was, it is believed, about 7 per cent. 
The credit of the company was not in question. The 
market was depleted of money and the rate of interest 
for all borrowers was abnormally high. 

On the other hand, day to day loans are frequently 
made in New York under ordinary conditions of the 
market at 2 per cent or less, while in London fractions 
of 1 per cent are not unusual for very short periods. 
The rate of interest for all the world is practically de- 
termined in the money market as a whole; but certain 
local markets have a dominant influence. These are 
London, Paris, Amsterdam, Berlin, Vienna and New 
York. The capital laboriously saved by the English, 
Dutch and Belgian middle class, and by the French 
peasants and small retired mercantile people, forms 
really the bulk of the constantly increasing fund of 
credit from which all the rest of the world draws. 

The relatively high rate of interest in new countries 
is due to the demand for capital for the rapid exploita- 
tion of the natural resources and for the construction 
of railways, harbors, cities, etc. Practically everybody 
in a new country is a borrower. 

255. The fimctio7i of caintal. — We must now con- 
sider what is the precise function which capital exer- 
cises so far as productive enterprises are concerned. 
From the description which was given of the meaning 
of complex production, it is clear that in the simplest 
form of that production capital is involved. In order 

C— I— 18 



274 ECONOMICS 

to obtain time to make a weapon or tool it is necessary 
to have a reserve of food sufficient to subsist the maker 
of the instrument while he is making it. If the process 
of making it demands only a short time, a small quan- 
tity of food is required; but if the process demands a 
long time, the quantity required is so much more. 

Anyone who has really attempted to live what is 
known as the " simple life " must have been convinced 
that it takes a very considerable portion of a day, in the 
absence of all adventitious assistance, to prepare food 
for personal consumption. If to this portion we add 
the amount of time necessary to procure the food by 
hunting, fishing or cultivation, it becomes clear that 
only tolerable expertness in all of these operations can 
yield enough for subsistence even if the whole day be 
occupied in working. 

If we eliminate altogether the products of previous 
work and attempt an absolutely fresh attack upon na- 
ture, we shall realize how difficult it is to make any 
progress at all. When we are able, however, to accumu- 
late a sufficient reserve of food to enable us to find time 
to make some implements which will facilitate our 
further operations we can manage more rapidly. We 
invent means to save time, and gradually we are able to 
accumulate more food and by means of that to make 
more instruments and so on. 

256. How capital comes into play. — Human prog- 
ress has indeed been accomplished in that manner. The 
accumulation of food and the instruments which we 
have made have together, as it were, lifted us from one 
stage to another. The food and the instruments were 
our capital, and our capital lifted us from one stage 
to another. 

This lifting process is really the function of capital. 



CAPITAL AND INTEREST 275 

If we have food and instruments enough we can per- 
form feats which take even a very long time. Thus, 
capital saves time, it enables us to do rapidly and easily 
that which we might otherwise do, but could only do 
laboriously and slowly, and it enables us to do some 
things which, without it, we could not do at all. The 
need for capital is, therefore, obvious. 

But in order to obtain capital, we must either ac- 
cumulate the food and the instruments ourselves or 
procure them from someone else. If we can by means 
of utilizing the food and instruments which we procure 
from someone else, increase our own resources, or if we 
can induce someone else to wait until we can return 
the food and instruments or their equivalent in some 
recognized form, it may be very advantageous for us to 
make an arrangement by which we may return more 
food and more instruments than we obtained originally. 
Indeed, we must do so in the normal case, for the food 
and instruments might have been productively used by 
their owners themselves. Our position as foodless and 
instrumentless persons might, indeed, impel us to offer 
much more at some future time, provided we were able 
to get immediate access to the comforts we wanted for 
ourselves, instead of waiting for them until we our- 
selves had accumulated the means of obtaining them. 

Briefly, then, capital enables production to be carried 
on by providing the means for the accomplishment of 
the various steps in the productive process prior to the 
performance of the operations involved in that process. 
The more numerous these steps and the longer the 
period which must elapse before the finished consumable 
goods make their appearance, the more capital is re- 
quired. 

It may be, as some have held, that capital is so 



276 ECONOMICS 

socially necessary that it ought to be provided by com- 
munal groups or by the State on certain terms to every- 
one who can utilize it; but whether it is provided by 
such means or through the existing competitive money 
market it is quite essential to progress. In this sense 
capital is not the enemy of labor, but is the indispen- 
sable support of it. 

In accounting for the phenomenon that present capi- 
tal is, in general, scarce, relatively to the demand, we 
are driven to the conclusion that this scarcity is due to 
the excessive absorption, in modern times, of capital in 
the form of present goods for the production of goods 
of a permanent character — goods, in other words, hav- 
ing in their nature many and long continued uses. 
These uses are stretched out, as it were, over so long 
a period of time that the numbers of them which are 
susceptible of immediate utilization are small in pro- 
portion to the immediately realizable utilities that have 
been absorbed in the making of them. 

257. Railway construction in United States.— An 
illustration drawn from the history of railways may make 
this point clear. When the railway system was being de- 
veloped rapidly, immediately after the conclusion of the 
Civil War, the United States was with difficulty able to 
borrow the amounts necessary for the construction of 
lines over the immense unoccupied spaces which inter- 
vened between the centres of population. It was, there- 
fore, indispensable that the lines should be constructed at 
a minimum of cost. The possible traffic upon them could 
not justify the method of construction which had been 
adopted by countries in which the population w^as rela- 
tively dense and in which trade routes of importance 
had already been established. Thus American railway 
construction was light and comparatively inexpensive. 



CAPITAL AND INTEREST 277 

The cost per mile was probably from one fifth to one 
sixth of the amount expended in Great Britain. 

258. Effect in Europe. — Yet the borrowing of the 
necessary capital not only strained the credit of the 
United States, but in a measure strained the credit of 
Europe. Why did it do so? The money had been 
supplied and expended. Why was there succeeding 
scarcity of capital and financial crises? 

In order to answer this question, we must bear in 
mind what had occurred. In the early seventies, the 
United States produced an insignificant amount of iron. 
Therefore, most of the iron for the railways had to be 
imported from England. There, the demand for iron 
in consequence of domestic and foreign requirements 
became very urgent. Stocks of pig iron which had 
been accumulating in the previous decade were speedily 
exhausted, new furnaces were " blown in " and addi- 
tional miners were employed to recover the additional 
quantities of iron and coal that were urgently de- 
manded. 

Wages advanced enormously, and the companies 
owning the iron works in the North of England and 
in the Clyde and Forth districts reaped immense profits. 

Meanwhile, in the United States, huge gangs of men 
were constructing the permanent way and laying the 
rails ; other groups were building locomotives and cars ; 
and others were building bridges and railway stations. 
All were working at high pressure and wages were 
relatively high. The capital subscribed chiefly by the 
European investor went into payment of these wages, 
manufacturing and other profits, etc. Tliat is to say, 
it provided for the daily maintenance for several years 
of the great army of men who were building lines and 
contributing in various ways to the equipment of them. 



278 ECONOMICS 

Some of these lines might yield a return to the capital in 
the shape of dividends at a more or less distant period. 
Many were destined not to return it at all. 

There was thus an enormous conversion of consum- 
able into unconsumable goods, or rather into goods 
which were consumable only at some remote period. 
When capital is circulating actively, when the produc- 
tive process results in rapid return, capital is not rela- 
tively scarce because it can be employed over and over 
again within a short period of time; but when the 
velocity of the return of capital is low, capital must 
be relatively scarce because what there is of it is not 
expeditiously employed. Thus, although the American 
railways were inexpensively constructed, they consumed 
an amount of liquid capital which proved to be embar- 
rassing not only for the United States but for Europe. 



CHAPTER VII 

THE LANDOWNER'S SHARE 

259. Value of land depends upon rent. — The obvious- 
ness of rent as the share of one of the factors in pro- 
duction varies in different countries. In Great Britain 
and in Continental Europe, with the exception of cer- 
tain parts of France, land is customarily possessed by 
one person and cultivated by another. In the United 
States and in Canada the cultivator is, as a rule, the 
owner, although the practice of renting land has be- 
come common in the United States during recent years. 
It is still rare in Canada. Even in the towns the prac- 
tice of the past in both countries was for the occupant 
of a house to own it, and although the practice has been 
much modified, especially in the larger cities, it still 
obtains in America to a much greater extent than is 
the case in Europe. The building of apartment houses, 
however, is causing the gradual disappearance of the 
small house and lawn which up till the present has been 
characteristic of the towns in the United States and 
Canada. 

It is thus not customary in America to speak of 
land in terms of its annual rent, but to speak of it in 
terms of the price at Avhich it is estimated it might be 
purchased, or its value " as between a willing buyer 
and a willing seller." This practice has had several 
reactions, one of them being the general adoption of 

279 



280 ECONOMICS 

the method of taxing land upon its estimated value and 
not as in Great Britain upon its annual rent. While 
rent as an element in distribution is thus, in America, 
somewhat obscured by the mode of estimating the value 
of land, it is nevertheless present whether or not it is 
readily recognizable. 

260. Origin of rent. — The historical origin of the 
rent of agricultural land has varied in different coun- 
tries. In those countries in which serfdom survived 
until it was surrounded by commercial economical con- 
ditions (as, for example, in Prussia, where serfdom con- 
tinued until 1806, and in Russia, where it continued 
until 1861), rent appears to have originated during the 
era of serfdom. Rent under these conditions was really 
a series of periodical payments, not for the use of the 
land, but for release from obligations sometimes at- 
tached to the occupation of land by the serf and 
sometimes attached to the ownership of the serf by his 
master. 

These foundations of the payment of periodical rents 
were often confused, although sometimes they were 
separated. The occupancy of the land did not depend 
upon the payment of rent by the occupant. Even if 
lie did not pay his rent, he could not be removed from 
the land. His movable property might be taken, if he 
had any; if it were taken, however, he might be de- 
prived of the means of further payment. It was thus 
expedient to flog or to imprison him. In any case, he 
could not be deprived of the land which it was his duty 
to cultivate. 

The periodical payments which he made in order to 
secure release from the obligation to render personal 
labor on his master's fields were not based upon the 
area or upon the value of the product of the land occu- 



THE LANDOWNER'S SHARE ^81 

pied by him, but were based upon the value of the labor 
which his master customarily exacted from him. 

The gradual change from the rendering of an indefi- 
nite number of days of personal labor, to the payment 
of a definite amount either in kind or in money, consti- 
tuted an important step toward freedom. Yet the pay- 
ments were sometimes so burdensome that it was impos- 
sible in many wide regions for the peasants to make the 
payments by means of the products of the cultivation 
of the land allotted to them. It was necessary for them 
to engage in industrial labor for the purpose of earning 
enough to pay the amounts due to their masters. 

When the commercial system of landholding replaced 
the feudal and analogous systems, the payments cus- 
tomarily exacted by the owners of serfs and of land 
were transformed into payments, exacted not in respect 
to commutation for services, but in respect to the occu- 
pancy of land, although they were in some regions still 
in excess of the amount which the peasant could pay, 
while living upon the produce of the area occupied by 
him. It was possible for the peasant to pay the amounts 
due in the name of rent under these conditions only when 
by hunting, fishing, domestic of factory industry he 
could supplement his income from the land in such a way 
as to pay the rent for it. Examples of these so-called 
non-economic rents abounded in Russia at the close of 
the era of serfdom and they survived in the Scottish 
Highlands and in Ireland until the grievances they pro- 
duced led to legislation upon the subject. 

261. Land as a commodity. — The rent of land in 
any strict sense could not arise until land became mo- 
bile, that is, until it could be bought and sold like any 
other commodity, and until there was no longer com- 
pulsory attachment to the soil. 



g82 ECONOMICS 

It cannot be denied that the system of indefeasible 
ownership of land has certain social advantages. It 
secures a country in the possession of an agricultural 
population. Under the pressure of compulsory labor 
upon the master's fields or upon the peasants' own fields, 
in order to maintain themselves or to pay the obligations 
due by them, there may be a considerable surplus of 
product over the actual needs of the population. On the 
other hand, in spite of a certain material prosperity, 
which is not incompatible with serfdom, experience has 
shown that the system breeds anomalous human rela- 
tions and leads to deterioration of both of the classes 
concerned. 

When, however, a commercial relation is established 
between the owner of the land and the occupier, diffi- 
culties of another kind make their appearance. Where 
the population is dense, the commercial owner of land 
is in the position of a quasi-monopolist. In other words, 
where the land market offers a limited supply in relation 
to demand, the landowners can exact a price which 
may amount to a share of the total produce of the com- 
munity relatively much greater than the share obtain- 
able by landowners in less densely populated regions. 

262. Similarity to other productive enterprises. — • 
The causes of friction between landowner and land cul- 
tivator are not, however, confined to such cases. Where 
the agricultural population is deficient in or destitute of 
agricultural capital, they occupy the same relative posi- 
tion with regard to the owner of the land as landless 
workers in factories occupy with regard to their em- 
ployers. Both classes are weak sellers of their manual 
labor. 

On the other hand, where there is competition among 
landowners for skilled farmers (a condition which 



THE LANDOWNER'S SHARE 283 

exists in some of the agricultural counties in England), 
where the farmers have sufficient agricultural capital, 
where the land is fertile and favorably situated with 
reference to a local market for its produce, and where 
the farm leases are fairly drawn, there is a sufficient 
advantage in the division of risk and of the advance- 
ment of capital between the landowner and the farmer 
to justify the wide adoption of the system of renting 
land. 

The diminution of prestige attaching to the owner- 
ship of land, owing chiefly to the diminution of the 
political influence of the landowners as a class, espe- 
cially in England and France, has had an important 
effect upon the land market. Large estates have been 
thrown upon it for sale with the consequence that the 
value of land, especially the land surrounding mansion 
houses together with the value of the houses has declined 
greatly, except where the land is situated on the out- 
skirts of growing towns where, in some cases, it has 
enhanced in value. 

263. Land policy in United States and Canada, — 
The land policy of the United States has been variable. 
Until the middle of the last century, land was granted 
or was sold at small prices in large blocks to 
private individuals or to groups of persons. It was 
understood that these persons were to make efforts to 
colonize their grants. Doubtless their greatest advan- 
tage would have lain in their doing so ; but colonization 
under such conditions is very difficult, and experience 
both in the United States and in Canada has shown 
that it is rarely successful. 

Under the influence of the pressure of population, 
the policy was changed, homesteads were granted 
gratuitously in certain regions and immigration soon 



284 - ECONOMICS 

absorbed the free grant lands. When the Western 
Provinces of Canada were opened to colonization 
through the construction of the Canadian Pacific Rail- 
way, the homestead grant plan was adopted, although 
large areas of land were granted to railway companies 
in alternate sections. Immigration has here also been 
absorbing the homestead grants until ere long there 
may develop a scarcity of land in spite of the magnitude 
of the region. It may yet be shown that homestead 
grants of 160 acres per family were too generous and 
that long before the country has been fully settled in 
any real sense, the public lands will all have been 
alienated gratuitously either to railway companies or 
to homestead settlers. 

264. Increase of land prices.— The increasing scar- 
city and remoteness of the free grant lands may check 
the flow of immigration ; but if for any reason this flow 
continues, the price of land must rise. A compara- 
tively small advance in price is likely to cause the break- 
ing up of the larger holdings, especially if there is for 
any reason a rise in the rate of interest, and the advance 
will by this means be checked. The advance in the 
price of agricultural land must have the effect of stimu- 
lating production, and where the land is suitable for 
intensive cultivation, this will have to be undertaken. 

265. Who benefits? — The class which will chiefly 
benefit by the increase in the price of land, which must 
take place should the demand be maintained, will be the 
presently existing farming class, for in anticipation of 
an imminent scarcity of land, farmers have been buying 
land heavily in the vicinity of their homesteads. The 
newcomers will have to pay the increased prices to these 
holders or " old livers " as they are called in Eastern 
Europe. 



THE LANDOWNER'S SHARE 285 

Should the " newcomers " be unable to purchase the 
land for farming pui'poses, although they might pos- 
sess capital sufficient for the business of farming apart 
from the amount necessary to purchase the land, the 
system of renting land may be expected to extend as 
it has done in Nebraska and other states of the Union. 
(Already about one-third of the farmers in the United 
States rent the farms they cultivate.) This system of 
renting from small holders of land, tends to bring into 
existence a class of small landowners who live in towns 
upon the rents paid to them by the farmers of their 
lands. In course of time, owing to pressure of popu- 
lation, some of those conditions which for hundreds of 
years have been familiar in Western Europe, seem 
likely to reproduce themselves upon this side of the 
Atlantic.^ 

266. Theory of rent. — The commercialization of 
landholding in Western Europe in the eighteenth cen- 
tury led to the development of a theory of land rent, 
as the growth of capitalistic industry at an earlier 
period had led to the development of theories of inter- 
est. The theory of rent, as it emerged at the end of 
the eighteenth century and the beginning of the nine- 
teenth, has not been subject to any widely accepted or 
serious modification. It is based upon the law of dimin- 
ishing returns which was at that time being pushed to 
extremes in all directions. Stated in its briefest form, 
it may be put thus: Rent arises because the fertility of 
any particular area of land is finite and because the 
fertility of different areas varies. 

If the application of successive amounts of capital 

*It is not intended to suggest that the complicated system of land tenures, 
which is the inheritance of remote ages, will be duplicated in America; but that 
the division of the functions of landowner and cultivator will become more prev- 
alent than they have hitherto been. 



286 ECONOMICS 

and labor upon a certain area of land could yield con- 
tinuously increasing quantities of produce, or if all land 
were of equal fertility, there would be no rent. The 
historical theory of rent which arises from this state- 
ment is that rent arose through necessity, under the 
pressure of population and the consequent demand for 
the cultivation of soils inferior to those previously in 
cultivation. The inferiority is due not merely or even 
necessarily to inferior fertility, but to inferior pro- 
ductivity, the facilities for cultivation and the distance 
from the market being taken into account. Rent thus 
appears as a surplus or net product which is yielded by 
a particular area of land, over and above the returns to 
the capital and labor expended in production, the 
amounts of these returns being determined in the re- 
spective competitive markets. 

267. Rent as surplus. — Looked at from the angles 
of the other sharers in distribution, rent appears as a 
surplus emerging above the normal level of wages and 
interest. This surplus is described as economic rent. 
It will be observed, however, that the idea of a surplus 
arising in a scheme of distribution of a common stock 
among several claimants is not precisely the same idea 
as that of the productivity of the factor of land as such. 
The landowner as landowner does not organize the 
productive operation, and the surplus may or may not 
arise out of the exercise of his function of landowning. 
The surplus may fall into his hands owing to the 
strength of his economic position; but if he were eco- 
nomically weak he could not obtain it. 

Thus, it is hardly a sufficient explanation of rent to 
say that it is a surplus. There is a sense, however, in 
which rent, interest and profit may be regarded as col- 
lectively constituting a surplus. In this sense labor is 



THE LANDOWNER'S SHARE 287 

conceived as being habitually rendered at the margin 
of subsistence of the laborer, and the whole cost of the 
productive process is conceived as being referable to 
labor. Therefore, all the value of the product above 
the cost of the labor is surplus value, and rent, interest 
and profit constitute this surplus value. 

268. ''Suvplus" theory not always applicable. — It 
may be suggested that, while the theory of rent which 
has just been stated briefly is applicable to several im- 
portant cases of rent, it is not sufficient to explain all 
cases, even though it may be accepted as sound so far 
as it goes. It does not apply, for example, to those 
cases of non-economic rents to which reference has been 
made above. The particular case of rent upon which 
stress is laid in this theory is the case of rent which 
is due to some differential advantage. This differen- 
tial advantage arises from an inherent property in the 
land or in the natural agent. The fertility of a piece 
of land A is twice as great as the fertility of a piece of 
land B; the rent of A would then be twice that of B, 
the respective fertilities being calculated not from zero 
but from the point which in either case is just sufficient 
to return the value of the capital and labor expended 
upon it, as estimated in the market for the produce and 
in the markets for capital and labor. 

Land is susceptible of a great variety of uses, and 
the value of it at the time of purchase or the rent ar- 
ranged for at the time of entering upon a lease may 
be very distantly related to the use to which the land is 
eventually put. In the case of increasing superiority 
of use in a productive sense, subsequent purchases or 
leases would take this superiority into account insofar 
as it was practicable to foresee the future. In view of 
the increasing mobility of land, it may be observed that 



288 ECONOMICS 

there does not seem to be any considerable advantage 
(granting the commerciaHzation and the consequent sub- 
jection of it to competition in the market for land) in 
separating the case of land from other cases of value 
— such as commodities, capital and labor — except inso- 
far as it is absolutely necessary to separate one category 
from another. 

269. General apjilication of the term rent. — There are 
many cases of differential advantage besides that of 
land to which the term rent may be, and sometimes is, 
applied. We may speak in this sense of the rent of 
vv'-aterpowers, the rent of machinery of different types, 
and we may speak of the rent of chemical processes 
arising from their differential advantages. We may 
even speak of the rent of ability as forming that part of 
wages or salaries v/hich is due to a man on account of 
his possession of some special aptitude. Some work- 
men acquire great dexterity in the management of fur- 
naces for the production of steel ; others for the manage- 
ment of the immense lathes upon which the propeller 
shafts of steamships are bored for the purpose of dimin- 
ishing their weight, etc. Part of the wages of these 
workmen may be described as rent of ability. A large 
part of the salaries of the managers or managing di- 
rector's of large industrial enterprises may be regarded 
as "rent of ability." 



PART IV: CONSUMPTION 

CHAPTER I 

CONSUMPTION FOR SOCIAL USE 

270. Classification of consumption. — Although con- 
sumption is the goal of production, and is, therefore, 
of an importance at least equal to that of production, 
the constituents of consumption as an economic depart- 
ment have not been so definitely reduced to formal ar- 
rangement as have those of production, distribution and 
exchange. 

In general, the department of consumption may be 
said to concern itself with the demand side of the mar- 
ket as production concerns itself with the supply side. 
We may, therefore, consider as belonging to this de- 
partment those causes of variation in demand to some 
of which we have already alluded in discussing Ex- 
change. 

Consumption may be regarded as comprising three 
important categories : 

1. Consumption for Social Use : 

(a) National and Civic Consumption — involv- 
ing compulsory demands upon the resources 
of the people. 

(b) Voluntary — arising from benefactions, en- 
dowments and the like. 

C— I— 19 289 



290 ECONOMICS 

2. Consumption for Personal Use — involving dis- 

cussion of the Standard of Comfort or normal 
level of consumption of the people, including 
variations from the normal level — the extremes 
being luxury and famine. 

3. Consumption for Productive Use— involving de- 

mand for the purpose of production of 

(a) Machinery, raw materials and partially fin- 
ished goods. 

(b) Men — under this head might be discussed 
appropriately the using up of human energy 
and life in production, industrial hygiene 
and pathology, the economic value of popu- 
lation, the mobility of labor and the move- 
ment of population. 

The reactions of consumption or demand 
upon the other economic processes would 
also fall to be discussed in this place. 

271. National consumption. — The income of the 
government insofar as it is derived from taxation 
must be regarded as a deduction from the aggregate 
incomes of the people who contribute the taxes ; insofar 
as the income of the government is derived from direct 
services to the people who enjoy the benefit and pay 
the price of these services, the income of the govern- 
ment cannot be regarded as a deduction because it is 
received for corresponding utilities directly rendered. 

Governmental demand may, therefore, be divided 
into two classes: the demand which arises from cer- 
tain services which are rendered by the government at 
the general charge, that is to say, by means of the tax 
fund; and the demand which arises from the rendering 
of specific services vdiich are paid for by the people to 
whom they are rendered. Thus, the service of national 



CONSUMPTION FOR SOCIAL USE 291 

defence is paid for out of the general tax funds or on 
occasion out of special war tax funds, or out of the pro- 
ceeds of loans raised and charged upon general or 
special funds, and is assumed to be rendered in the uni- 
versal interest — those who pay no taxes enjoying the 
same benefits as those who do. On the other hand, the 
cost of the service of the Post Office is, as a rule, de- 
frayed out of the postal revenues. This is not always 
the case. For many years after the penny post was 
instituted in England, the Post Office revenues were 
insufficient to meet the expenditures. The Postal Tele- 
graph system has always been conducted at a loss which 
had to be met out of other sources of revenue. Even 
now, if interest upon the capital invested in the Post 
Office is considered, the British Post Office barely pays 
its way. The Canadian Post Office and the United 
States Post Office are in a less favorable position be- 
cause of the inferior density of population. The Post 
Office, in general, may be said nearly to pay its way, 
the balance against it, where such a balance occurs, be- 
ing met out of the general tax fund. The case of a 
public ser^dce of this kind making a profit is considered 
later. 

There are certain forms of governmental expenditure 
which do not directly benefit the whole of the people, 
but which do directly benefit some at the expense of the 
general tax fund. The maintenance of the poor where 
there is a national poor law, the provision of education 
where this is done gratuitously or below cost and the 
administration of justice are examples of this order of 
expenditure. Indeed, in most countries at the present 
time, governmental administration is being utilized 
more and more as an agent for the distribution of 
wealth, sometimes with the avowed intention of dimin- 



292 ECONOMICS 

ishing the inequalities which are brought about by dis- 
tribution unregulated by government — what Adam 
Smith called "natural distribution." ^ 

272. Effect of government consumption upon de- 
mand. — The expenditure of the government involves 
consumption and thus involves demand. The public 
offices, docks, state railways, roads, bridges, etc., con- 
structed to the order of the government, constitute, 
especially in new countries, a large part of the consump- 
tion of structural material and other commodities, and 
a large part of the demand for labor. Some of these 
works no doubt would have been undertaken by private 
individuals or groups of individuals had the govern- 
ment not undertaken them, but many of them would 
not; because private enterprise is not sufficiently de- 
veloped; because it is otherwise fully engaged; because 
the nature of the enterprise, useful though it may be, 
is such that specific return cannot be expected, or be- 
cause the enterprise would be difficult to organize other- 
wise than governmentally ; or because, as in the case of 
the Panama Canal, private enterprise has failed; or be- 
cause the enterprise has been undertaken by the govern- 
ment merely in obedience to local pressure and without 
any prospect of eventual usefulness, the only object 
being the local expenditure. 

273. Diversion of capital. — Governmental employ- 
ment of capital means, however, diversion of it from 
use by other agencies. Even if the government re- 
frained from using national accumulations and bor- 
rowed abroad for its requirements, its operations would 
restrict the credit of the nation otherwise. If we were 
to suppose that the amount of capital available for 

' How far governmental distribution can reach the desired end is discussed 

elsewhere. 



CONSUMPTION FOR SOCIAL USE 293 

either governmental or private employment is a fixed 
quantity, which would be utilized in any event, then its 
direction, provided it were employed equally produc- 
tively, would not affect the "national dividend." 

But capital cannot be looked upon as a fixed quantity 
in any one country The government or private in- 
dividuals may draw capital from abroad, and sometimes 
the government can do so when private individuals 
cannot. Moreover, if the government draws more than 
a certain amount (this amount depending upon the 
conditions of the market), private individuals in the 
same country may find it difficult to draw enough for 
their requirements or, indeed, any at all. Thus, unpro- 
ductive expenditure by the government may act very 
injuriously by absorbing the borrowing powers of the 
country as a whole. This applies also where the ex- 
penditure is not necessarily unproductive in the large 
run, but only unproductive in the immediate sense, for 
the demands upon the market are the same in amount, 
although they are not the same in character. 

The heavy borrowing of municipalities in Great Brit- 
ain prior to 1903 exercised an important influence in 
depriving the money market of liquid funds seeking 
investment, and the heavy borrowing of the Canadian 
governments and municipalities during the decade be- 
tween 1903 and 1913 had the same effect. 

If the character of the consumption initiated by the 
government is unproductive, or if the period during 
which it becomes productive is very remote, such con- 
sumption may result in a greater diminution of the re- 
sources of the nation than would have been the case had 
the government refrained from the enterprise alto- 
gether. On the other hand, governmental expenditure 
may be more wisely conducted than private expendi- 



294 ECONOMICS 

ture and may, therefore, eventually conduce to greater 
increase in the "national dividend." 

274. Voluntary consumptioji for social use. — In the 
Middle Ages such consumption was probably propor- 
tionately greater than it has been in modern times. 
Bridges, hospitals, schools and colleges were built and 
endowed by pious benefactors. Many of the functions 
which are now exercised by the State were in earlier 
times exercised by the people. The care of the poor, 
for example, which in modern European countries is an 
affair of the government, was in the Middle Ages an 
affair of the pious. In modern times large benefactions 
are continually being made for public purposes ; parks, 
hospitals and other public places are being given by 
individuals or are being subscribed for by many for 
social consumption. Many of the sums of money so 
devoted are withdrawn from individual expenditin-e 
and from immediately productive uses. It is clear that 
here, also, a certain proportion between the productive 
consumption and consum]3tion which is not directly pro- 
ductive must be observed. Even charitable endowment 
may go too far. A charitable trust may be so heavily 
endowed and so administered that it becomes a public 
danger. Locking up large sums in endowments and 
the devotion of the proceeds of estates to charitable and 
to ecclesiastical purposes have, in many countries, fre- 
quently assumed so great dimensions that the practices 
have had to be checked by legislation. 



CHAPTER 11 

CONSUMPTION FOR PERSONAL USE 

275. Personal requirements, — Consumption for per- 
sonal use may be considered under the same three heads 
as those into which national consumption has been 
divided. These are: necessities, conveniences and 
luxuries. It is impossible in practice to draw as sharp 
lines between these as if they were regarded as indica- 
tions on a scale, nor' could the scale which might be 
applicable to one person or community at one time be 
regarded as applicable at another time or in a different 
community. Nevertheless, the division has a certain 
importance in respect to the relative value which is at- 
tached to commodities according as they appear in one 
or another of these divisions. 

In addition to the vertical method of classification, 
as it may be called, demand for consumption may be 
classified horizontally into the following classes: food, 
clothing and shelter. There are other needs which do 
not require at the present moment to be considered, be- 
cause they do not necessarily or directly result in a 
demand for commodities and, therefore, do not in the 
strict sense result in consumption. 

The three categories first mentioned may be applied 
to food, clothing and shelter. In any general survey 
of social groups of the same race and in groups of 
different races, we encounter the widest difference. For 

^95 



296 ECONOMICS 

the nomadic life, food is essential always, clothing gen- 
erally, shelter occasionally. For settled husbandry or 
industry, shelter and clothing are almost, if not quite, 
as essential as food; indeed, social pressure is such that 
in some races the desire for clothing to an extent which 
might be regarded as luxurious is stronger than the de- 
sire for food ; and there are some groups of people who 
live penuriously in large houses because they attach im- 
portance to an external appearance of wealth. Such 
expenses may be unusual, but the relative importance 
which people attach to the different orders of consum- 
able goods affects demand profoundly. 

276. Food. — An inquiry into the history of food 
would reveal an extraordinary diversity of plants, ani- 
mals and even minerals which are used as food. The 
law of substitution plays a large role. When one 
variety of food is difficult to procure, other varieties 
are sought. Thus, when the grains possessing superior 
nutritive power or superior attractiveness to the pal- 
ate are scarce and ex23ensive, other grains and even 
other substances than grain are consumed. In North- 
ern Russia and in Sweden when the grain harvest is 
poor and the peasants experience a deficiency, they 
mingle the ground inner bark of the pine with flour in 
bread. The astringent property of the pine bark is 
indeed valued to such an extent that even when grain 
is not scarce, peasants may be found who adopt this 
practice. When the grain harvest is poor, also, the 
peasants habitually sell their grain, which they can do on 
such occasions at relatively high prices, and buy potatoes, 
which though not so nutritious, nevertheless, satisfy 
their craving for food. 

Some races have invincible preferences for certain 
i^arieties of food and approach other varieties with great 



CON'SUMPTION FOR PERSONAL USE 297 

reluctance, although these may be consumed freely by 
others. Civilized man in general dislikes food which 
has become putrid; primitive man is in general not 
averse from consuming fish which has been, to his palate, 
improved by long keeping, and even ci^dlized man likes 
his game "high." So, also, the delicacies of one race 
are the abhorrence of others, except in cases of. need. 
For example, the so-called edible dog is regarded as a 
luxury in China, while other kinds of dog are not con- 
sumed. In Europe, the dog is not usually consumed at 
all, although during the siege of Paris in 1871 all kinds 
of dogs were to be obtained on the stalls of the butchers. 
Horseflesh is extensively consumed in Germany; and 
perhaps not at all in either England or America. The 
tabu which plays so large a part in primitive social or- 
ganization has many forms, but among these there is the 
tabu of certain plants or animals which have been found, 
in general or on occasion, to produce disease. In regions 
where the species in question do not produce the same 
consequences, the tabu does not exist. 

The appropriateness of food depends upon latitude 
and longitude. In the tropics, fruit is plentiful, but 
at certain seasons its consumption is attended with dan- 
ger. One of the difficulties of the acclimatization of 
Europeans in the tropics is the reluctance with which 
the European consumes the same food as that which 
is consumed by the native tropical races. 

The relation between food and work has been to 
some extent worked out in connection with the formu- 
lation of army and prison dietaries. Details cannot be 
given here ; the dietaries themselves should be consulted. 

It is very clear that industrial efficiency, insofar as 
it depends upon the exercise of muscular energy, must 
dejjend eventually upon the constant recuperation of 



298 ECONOMICS 

that energy by appropriate and readily assimilable 
food. 

277. Clothijig. — The customs regarding clothing 
have radically changed since the end of the eighteenth 
century. Until about that time the people of each coun- 
try, each district, and in some countries, each village, 
wore a characteristic dress, and their dress was further 
differentiated according to the class, profession or trade 
to which they belonged. This state of matters was not 
due to legislation, although legislation sometimes en- 
forced an already established practice. It was due to 
the independent evolution of design in clothing on the 
part of people who made their own clothing for the 
special purposes of their own handicraft or profession, 
and who sometimes bestowed skill and leisure upon its 
decoration. 

The art of embroidery and lace-making were much 
practised throughout Europe, and the products of these 
arts in different regions were characterized by the differ- 
ence in design which arose from the circumstance that 
in each place the growth was indigenous. The laces of 
Venice, Valenciennes, Brussels and Honiton were 
among the most celebrated. The people of Brittany 
and those of the Landes, in France, and many of the 
villagers in different parts of Austria still wear the 
characteristic costumes of their villages. In Somerset- 
shire in England embroidered " smocks " may still be 
worn by farm laborers as the "blouse" is still worn by 
the Parisian artisan. The Japanese artisan wears a 
coat upon which his trade is indicated by the sign for it. 
Survivals also occur everywhere in the preacher's gown, 
in the gaiters and apron of the bishop, in the doctor's 
hood, in the silk gown of the King's Counsel, and, above 
all, in the uniform of the policeman and the soldier. 



CONSUMPTION FOR PERSONAL USE £99 

Since the growth of variety in design was due to 
indigenous manufacture in various places, there was a 
tendency toward general uniformity so soon as the 
manufacture of certain textiles became concentrated in 
one or in a few places. The risk attending the wear- 
ing of ex]3ensive clothing and the destruction of aris- 
tocracy in France contributed to the change, but the 
policy of centralization and uniformity of the Na- 
poleonic regime did more to carry the change in cloth- 
ing into effect in that country. Throughout Europe 
generally, the decay of class distinctions contributed, 
with the causes relating especially to manufacture, to- 
wards other results which may now be seen. 

It is quite impossible from the clothing of a person 
to determine to what country in Europe he belongs, 
and it cannot be affirmed with certainty, except in 
extreme cases, what is his profession, trade or position 
in society. The same is true, also, of America. The 
manufacture of ready-made clothing was practically 
unknown in 1850; now the ready-made clothier may be 
said to clothe both man and woman kind. The stand- 
ardization of clothing has followed the extension of its 
manufacture, and uniformity has been the necessary 
consequence. Formerly, where every stranger in Paris 
wore an unique costume — the Arab in his humous and 
the peasant of the Landes in his velvet jacket and silver 
buttons might be seen any day and no one turned to 
look — now where everyone looks alike, a strange cos- 
tume attracts unwelcome attention. This is true of al- 
most every city in Europe or America. In Asia, Japan 
only has to a slight extent, and only in the cities, adopted 
European uniformity. 

278. Shelter. — The question of housing people is not 
less important than that of clothing them. Housing 



300 ECONOMICS 

also has a long and varied history. The growth of 
domestic comfort is, however, a very modern affair. The 
palaces of the Pharaohs and of other Eastern sovereigns 
of early civilization were sometimes very extensive. 
They had numerous rooms and evidently were managed 
by a formidable administration; but there is little evi- 
dence of comfort in their interiors. 

Glass is an ancient invention, but its production in 
large sheets is comparatively modern. Until the close 
of the Middle Ages there was very little glass even in the 
great houses. Rooms were dark and ill ventilated or 
they were open to the wind. Horn was used to some 
extent, but even when thin it is not extremely trans- 
lucent and cannot be obtained in large pieces. Oiled 
paper has been used in Japan for ages, but it does not 
appear to have been used for windows in Europe. 

Chimneys were uncommon even in great houses un- 
til after the Middle Ages, and there are numerous com- 
forts of a minor kind which in the medieval house were 
unknown. 

Those who have seen a peasant cabin lighted by a 
single rushlight will realize what the interior of a house 
was like before candles were introduced. There was, 
indeed, little light in any houses until the use of gas 
as an illuminant was adopted in the beginning of the 
nineteenth century. There are, or were, until recently, 
towns in northern Italy where oil lamps were hoisted at 
street corners by means of a rope and pulley. The 
darkness of the towns until the middle of the nineteenth 
century offered facilities for crime and diminished the 
duration of the working day in many industries. Elec- 
tric lighting has transformed the streets and has led in- 
cidentally to great improvement in gas appliances. 
Numerous inventions have made the interiors of houses 



CONSUMPTION FOR PERSONAL USE 301 

potentially, and to a great extent actually, vastly more 
habitable than they were a hundred and fifty years ago ; 
but the same imx3rovement cannot be said to have taken 
place externally. Domestic architecture has not kept 
pace with interior domestic devices. 

279. Philanthropic housing experiments in Europe. 
— In the villages and smaller towns of western Europe 
workmen frequently own the houses they occuj^y; but 
this is very rare in the larger cities. From the point of 
view of the workman it is not altogether desirable that 
he should do so even if it were financially practicable. 
The ownership of a house limits his freedom of move- 
ment and thus, on occasion, fixes him to a particular 
employment and thus limits his earnings. 

The earlier experiments in the housing problem — 
those, for example, of the Peabody Trust, and Lord 
Rowton in London ; those of the municipalities of Glas- 
gow and Liverpool and of various housing companies 
in New York were carried out before the development 
of urban transportation. It was then supposed that 
the workman must live as near as possible to the scene 
of his daily labors ; that he could afford neither the time 
nor the money to transport himself from a distance. 
In consequence of that doctrine, the tenement houses 
built for the occupation of workingmen under these 
semi-philanthropic schemes were invariably built within 
the industrial districts, and frequently on land which 
was in demand for industrial purposes and winch was, 
therefore, high in value. The general result of those 
experiments was not, therefore, by any means as satis- 
factory as had been anticipated. Even at rents which 
yielded a net return of some 4 per cent upon the capital 
invested, the rents were so high that only the elite of 
the working class could occilpy them, and those for 



302 ECONOMICS 

whom they were primarily intended could not afford to 
do so. 

At a time when the professional classes and others 
with incomes only a little higher than those of working- 
men were anxious to get into the suburbs of towns, 
where they might have fresh air, cheap land, moderate 
rents, the workingman was provided by well-meaning 
but mistaken philanthropy with houses in the centre of 
towns at a ruinously low rent to the promoters of the 
enterprise, and a ruinously high rent to the working- 
man. In some cases counsel that appeared to be wiser 
prevailed, but even this was rendered of little effect by 
neglect of some fact in human nature which should 
have been taken into account. 

280. Typical results. — ISTothing, for example, could 
be more magnificent or more dismal than Pullman City, 
near Chicago, or the similar experiment of M. Godin 
at Guise, in France. Both of these housing experi- 
ments were carried out in newly created industrial 
centres, and they might have been successful had the 
promoters not desired to standardize houses as they 
standardized, on the one hand, sleeping cars, and on the 
other, kitchen stoves. 

While enthusiastic interest in any social scheme is 
very valuable to the promoters as a discipline, it is usu- 
ally of small importance to those who most need the 
aid of philanthropy, and who are also, no doubt, re- 
luctant to ask for it. The reason for the disappoint- 
ment which usually attends philanthroj^ic housing 
schemes is that such housing experiments are usually 
accompanied by efforts for the improvement of the 
people. Working people in steady employment do not 
care to be patronized, do not care to have the locality 
where they must live determined for them, and, above 



CONSUMPTION FOR PERSONAL USE 303 

all, do not care to be embarrassed by regulations. They 
are disposed to buy their houses or to rent them on the 
same commercial basis that they buy their tea and sugar. 

The extension of municij)al boundaries and the de- 
velopment of urban and radial transportation has al- 
tered the problem materially. Yet the arbitrary selec- 
tion of an area for the development of a working class 
district by a philanthropic or semi-philanthropic agency 
is likely to result in disappointment. 

281. Eccperiments by employers. — Experiments in 
housing by manufacturing enterprises for the benefit of 
their workmen have also very rarely been successful. 
The reasons are, first, that occupancy by a workman of 
a house belonging to his employer is looked upon as in- 
terfering with independence and liberty; and, second, 
that, unless in the district in which the works and 
the houses are situated, there is employment not only 
for the head of the family but for the younger members 
of it, there will be reluctance on the part of the workers 
to occupy the owner's houses. An instance of both of 
these objections is to be found in an experiment 
which was made many years ago by the Singer 
Sewing Machine Company. That company established 
works on the Clyde about nine miles from Glasgow 
on a site not previously used for industrial pur- 
poses. As it was at a considerable distance from the 
nearest centre of population, the company built a 
number of houses for the purpose of providing accom- 
modation for its workers. The workers who were re- 
cruited by it had lived in the extreme east end of the 
city, while the works were beyond the extreme west endi. 
The sewing-machine works employed men almost ex- 
clusively, while the women were extensively employed 
in the factories in the east end. 



S04 ECONOMICS 

Partly for this reason and partly because the men 
conceived that they would in some measure place them- 
selves in the power of the company and would diminish 
their opportunities for changing their employment if 
they wished to do so, they continued to travel daily the 
twelve miles which intervened betv^^een their accustomed 
houses and the works w^here they were employed. They 
did this in spite of the fact that their houses were situ- 
ated in what may fairly be called "slums," while the 
works were in a healthy suburban neighborhood, at 
that time almost unbuilt upon. They were enabled to 
perform the daily journey by means of extremely low 
weekly (commutation) tickets on the railway. 

282. Houses owned hy workmen. — In the industrial 
towns and on the boundaries of the great cities in Can- 
ada, the workmen own the houses they occupy, to an 
extent quite unknown in Europe. The relative elas- 
ticity of the municipal building regulations, as com- 
pared with those of European cities, accounts for this 
condition to a large extent. 

In 1905 and 1906 a ring of workmen's houses of the 
simplest kind of construction grew up round Toronto. 
Most of the groups of houses were built upon land 
which at that time had not been brought within the 
municipal boundaries. There were no streets, although 
there w^ere street allowances ; there was no drainage, no 
water supply, nor were there any civic services what- 
ever. The land was cheap; $4 per foot frontage 
(amounting to about 5 to 6 cents per square foot) was 
the normal price. Thus, for $100, payable in instal- 
ments, a w^orkman could acquire fifty feet of land front- 
age; for $50 to $100 he could build a rude "shack" which 
was sufficient, after a fashion, to house his family. wSo 
long as these new, imperfectly urbanized areas were 



CONSUMPTION FOR PERSONAL USE 305 

scantily inhabited, conditions were quite endurable ; but 
as the "shacks" became more numerous and the popu- 
lation more dense, the absence of proper sanitation, fire 
protection and the like rendered the existence of this 
"ring of shacks" more or less of a public danger. The 
boundaries of the city have been extended, and the 
"shacks" have been gradually replaced by brick houses 
or have been repaired with brick. The value of the 
land has advanced considerably and the generation of 
workmen who built "shack town" has benefited by this 
advance. But the problem of housing for those who 
were not fortunate enough to arrive in time to take ad- 
vantage of the conditions of 1905 and 1906, is as acute 
as it was before "shack town" existed. 

283. Subject to economic laws, — It is obvious that 
the provision of housing accommodations upon a scale 
commensurate with the growing industrial population 
is quite beyond merely philanthropic or semi-philan- 
thropic agencies. The demand for houses, in so far as 
it is effective, may be counted upon eventually to result 
in an adequate supply. This has been the experience 
of all cities. The supply may, indeed, as it does occa- 
sionally, exceed the effective demand. In Great Brit- 
ain the normal course of the history of housing is as 
follows : 

When industry is brisk, when people crowd into the 
towns in consequence of the difference between urban 
and rural wages, there is a great demand for houses, 
rents advance and there is a strong inducement to build. 
But the high rents notwithstanding, capital invested in 
house property rented to working people does not as 
matter of experience yield a high net return under nor- 
mal conditions. The depreciation, the trouble of col- 
lecting rents, and the risk of loss are all considerable, 
c— I— 20 



S06 ECONOMICS 

Compared with the profits which may be obtained from 
manufacturing industry in periods of brisk trade, the 
business of house letting is not remunerative. It is thus 
not until the period of brisk trade is over and capital, 
which has been occupied or has just been made in busi- 
ness, is seeking investment, that building begins before 
rents fall from a cessation of the influx of population. 

The same conditions obtain, other things being equal, 
in new countries, with this qualification, that under a 
system of protection, where such exists, the profits of 
manufacturing or trading enterprise are even under 
normal conditions so much greater than the customary 
yield from rented property, that there is» little induce- 
ment to embark in the house proprietary business. 
Housing is thus more likely to be a continuous problem 
in a new country than in an old one, even though the 
price of urban land may be low. If, however, the price 
of urban land is forced upward by demand for manu- 
facturing or trading purposes, working people and 
others who desire houses at moderate rents or at a mod- 
erate price must go outside of the boundaries of the 
cities to procure them. 

It should be observed that insofar as by means of 
philanthropic or semi-philanthropic effort commercial 
house building is met by subsidized competition, there 
may be a temporary reduction of rents, because of the 
increased supply of houses, but if this occurs the induce- 
ments to enter into the business will be diminished and 
unless increased philanthropic efforts are made, there 
will be a tendency for rents to advance to their former 
level, provided the demand for houses increases. 

When the supply of houses is deficient in relation to 
the demand for them, there is usually much overcrowd- 
ing. When this condition occurs it is necessary, in the 



CONSUMPTION FOR PERSONAL USE 307 

interests of public health, to enact and to enforce strin- 
gent measures to prevent it. If the enforcement of 
such measures is not continuous and uniform, it may 
lead to further increase of rent in certain localities. If, 
however, it is continuous and uniform, it will tend to 
disperse the population and to prevent undue density in 
any one locality. 

284. Miscellaneous personal consumption. — In the 
rural districts of all countries, miscellaneous consump- 
tion is much less than in towns, although during the 
past century the general increase of such consumption 
has been manifest. The extent and character of mis- 
cellaneous consumption varies, however, in different 
races, and varies also with the income among people of 
the same race. The Italian peanut vendor in New 
York, no matter how slender his income, spends his 
evenings at the Marionette Theatre, as the Jewish gar- 
ment worker spends his at one of the Yiddish theatres 
or at one of the numerous Jewish clubs in Niew York. 
In Russia, a concertina has becom.e almost as necessary 
to the peasant as a red shirt for holidays. The so-called 
"millinery openings" at Winnipeg indicate a large "mis- 
cellaneous consumption" in farmers' families in the 
North West. In the towns everywhere amusements of 
many kinds absorb much of the earnings of people of 
all classes. 

Among workingmen, as among the professional 
classes, miscellaneous expenditure has increased with 
the leisure obtained by the shortening of the hours of 
labor and by the increase of professional incomes. Life 
in general has become less rigid and more varied. Life 
involves more strain and requires more relaxation. It 
has become evident that in times of prosperous trade, 
the miscellaneous expenditure of all trading classes as- 



308 ECONOMICS 

sumes large proportions. Luxurious expenditure upon 
automobiles and the 'like accounts, indeed, sometimes for 
a very considerable proportion of income. The con- 
centration of the population in towns has contributed 
largely to the increase of the total of luxurious expendi- 
ture by the people. 

Increase in miscellaneous expenditure is, in general, 
a decisive indication of a change in the standard of 
comfort, even though the miscellaneous expenditure 
may not be judicious. That there has been a very gen- 
eral rise in the standard of comfort throughout the 
world during the past centurj^ there can be no doubt. 
It may be that tlie total of human toil has not been 
lightened; but the total of human production has been 
greatly increased and this increase has gone partly, al- 
though not wholly, into increased consumption by the 
mass of the people. This increased miscellaneity of 
consumption may be held to the due to change in the 
plane of economic life. 

For example, during the period since the revolution 
in Japan, that country has become gradually commer- 
cialized, and the mercantile class has been adopting 
American and Western European modes of transacting 
business. They have been doing business on a larger 
scale and have been incurring increased responsibilities. 
The simplicity and frugality of Japanese life has thus 
become no longer possible for the more important mer- 
chants. Although, so far as practicable, they retain 
the older mode of life for their families, they find they 
cannot do so for themselves. They find that the cus- 
tomary Japanese diet does not provide them with the 
additional amount of nervous energy which they require 
for larger affairs. They, therefore, adopt a com- 
promise — living partly in the Japanese and partly in 



CONSUMPTION FOR PERSONAL USE 309 

the American or European manner In respect to food, 
and increasing their miscellaneous expenditure even in 
ways distinctively Japanese. 

285. Proportions of the constituents of consumption. 
— Many inquiries have been made by means of the col- 
lection of family budgets into the proportions of ex- 
penditure upon the various kinds of consumption. The 
general conclusion has been arrived at, that in the case 
of the lowest incomes, the actual cost of subsistence ac- 
counts for the larger part of the expenditure, amount- 
ing approximately to 60 per cent of the total. The 
proportionate cost of clothing is very small in the lower 
incomes, increases in the intermediate incomes and de- 
clines again in the higher incomes. The proportionate 
cost of house rent, fuel and light is approximately the 
same whatever the income, although in cases of very 
high incomes it is somewhat less than in the case of 
intermediate incomes. In the very lowest incomes it is 
often greater in proportion than in the intermediate in- 
comes. Miscellaneous expenditure increases steadily 
with the income; in the case of very high incomes it 
forms a large proportion of the total expenditure. 

286. The cost of living. — Variations in the cost of 
living may arise in one or the other of two ways ; either 
the consumption has varied in quantity or in character, 
or, the quantity and character remaining unaltered, 
prices of the consumed commodities have changed. The 
standard may be reduced or raised without altering the 
cost of living if, when prices rise, the comfort is reduced, 
or if, when prices fall, the comfort is increased, provided 
the rise and fall of prices apply to the commodities 
which comprise the consumption. A farmer, for ex- 
ample, who has reaped an inferior harvest of wheat or 
rye, will sell what he has of these grains and buy inferior 



310 ECONOMICS 

grains or potatoes. His cost of living will be dimin- 
ished, if he previously consumed wheat or rye; but his 
standard of comfort will have declined because he has 
been driven to consume less nutritious food. On the 
other hand, an artisan accustomed to the use of potatoes 
may find if there is an unusually abundant wheat or 
rye harvest that he can raise his standard of comfort 
and can consume more nutritious food than he had been 
accustomed to consume because the fall in the price of 
these grains brought them within his reach without in- 
creasing his expenses or cost of living. 

When, owing to some wide general cause, the prices 
of the commodities customarily consumed by the mass 
of the population advance, the cost of living increases 
and at the same time owing to the difficulty of adjust- 
ing incomes to the increased expenses necessitated by 
the advance of price, consumption diminishes and the 
standard of comfort declines. 

This condition was experienced in "the dear years" 
(1802 and 1803) when the accessaries of life rose in 
price and when people norm.ally above the pinch of 
want found that they had to stint themselves of things 
that they were accustomed to regard as necessaries. Salt, 
for example, rose to so high a price that even, well-to-do 
people had to forego the use of it. 

During a period of rising prices, possessors of stocks 
of commodities gain, and their standard of comfort 
tends to rise because with their stocks they can purchase 
more of certain commodities than they could formerly 
purchase. In the very rare case of a general rise of 
prices of commodities, holders of stocks of commodities 
could employ more labor or they could hoard the funds 
derived from the sale of their stocks. 

When prices of the necessaries of life fall, the stand- 



CONSUMPTION FOR PERSONAL USE 311 

ard of comfort of the mass of the people rises, provided 
their incomes remain the same. This seldom occurs, 
for although the wages of labor do tend to rise and 
fall because the prices of necessaries rise and fall, the 
movements are rarely coincident. In the interval the 
wage earner gains when prices are falling and loses 
when prices are rising. The sharp fall in the price of 
wheat which occurred after the battlp of Waterloo had 
closed the epoch of the Napoleonic wars, ruined the 
farmers, but benefited the people. Although wages of 
agricultural laborers soon fell, the wages of artisans 
were-pirvdbably not seriously affected, at all events, for 
some time afterward. 

287. Changes in 1850 and 1875, — The rise in prices 
which occurred in the fifties of the nineteenth century 
affected chiefly those commodities which entered into 
shipbuilding and railway construction, as also did the 
rise in prices wliich occurred in the early seventies. 
Rents advanced in the towns owing to the migration to 
them from the rural districts on account of industrial 
activity and agricultural depression. Wages in the 
towns were high and the standard of comfort of the 
mass of the population was raised. In some industries 
(in mining, for example), wages rose to a very high 
point and the mode of life of miners was for a time 
entirely altered. 

About 1875 industry declined and prices of the stable 
commodities fell, so also did wages and the former stand- 
ard of comfort was, in effect, resumed; and as the de- 
pression deepened, although prices were low, the stand- 
ard of comfort was low also, because wages had fallen. 
It was not until 1886 that prices began to advance. 
The labor market improved, wages rose and an advance 
in the standard of comfort followed. Low prices thus 



312 



ECONOMICS 



do not necessarily involve improved comfort nor do 
high prices necessarily involve diminished comfort. 

288. Prices in 1890-1909. — It is obvious that not all 
commodities enter into normal domestic consumption, so 
that a curve showing the increases in prices of the great 
staples would not necessarily throw light upon the cost 
of living. It is possible, however, to take certain se- 
lected commodities which enter largely into domestic 
consumption and to inquire what the course of prices 
of these commodities has been over a certain period. 
By way of illustration, we may take the prices of grains 
(wheat, barley, corn, etc.), of animals (bec^^ uacon, 
mutton, fowls, etc.), of dairy produce (milk, butter, 
cheese, etc.), of fish, of groceries (tea, coffee, sugar, 
etc.), of textiles (cotton, wool, etc.), and of animal 
products (leather, etc.), during the period from 1890 
until 1909; that is to say, during a period of twenty 
years. The method of calculation by means of index 
numbers has already been described. The following 
index numbers reveal the fluctuation of the commodities 
in question, the average price of each group of commod- 
ities for the whole period being regarded as equal to 
100, and alternate years only being taken. 





1890 


1892 


1894 


1896 


1898 


1900 


1902 


1904 


1906 


1908 


1909 


Grains. . . . 


116 


106 


94 


86 


100 


100 


116 


116 


118 


148 


150 


Animals. . 


110 


110 


100 


83 


97 


104 


122 


112 


130 


129 


149 


Dairy 
























produce. 


104 


106 


105 


90 


93 


109 


108 


107 


120 


137 


134 


Fish 


102 


91 


m 


103 


100 


107 


112 


119 


121 


122 


134 


Groceries . 


120 


104 


Q5 


87 


95 


93 


98 


101 


103 


110 


108 


Textiles. . . 


111 


102 


97 


97 


95 


110 


102 


110 


124 


111 


109 


Animal 
























products 


101 


100 


90 


94 


104 


114 


118 


114 


128 


121 


134 



289. Important increases, — These figures suggest 
that the principal increase in price during the period^ 



CONSUMPTION FOR PERSONAL USE 313 

although the increase is by no means continuous, has 
taken place in the products of the extractive industries — 
agriculture and cattle raising. The increase in the prices 
of grains may be attributed to the relatively inferior har- 
vests of the later years (1908 and 1909) ; prior to these 
years the price had not advanced materially. The in- 
crease in the price of beef and other meats may be at- 
tributed to the diminution of ranching and to the high 
price of fodder, which rendered the feeding of stall-fed 
cattle unprofitable. For the same reason, dairy and 
animal products exhibit an increase. The price of fish 
has probably advanced owing to the increased consump- 
tion, due to the substitution of fish for beef. Textiles, 
which are the product of manufacturing industry, al- 
though primarily also the result of extraction, have 
fallen and so also have groceries, the latter being largely 
imported into the United States and Canada. 

The advance in price of grains and of animals and 
animal products appears thus to indicate an advance in 
the cost of living between 1890 and 1909, with inter- 
mediate fluctuations of approximately 30 per cent. But 
these statistics do not afford the whole of the data con- 
nected with the cost of living. In addition to food and 
clothing, the relative costs of which the index numbers 
indicate, there are shelter and fuel as important items 
of domestic expenditure. In the urban centres, owing 
to the increased population of these, rents have undoubt- 
edly risen, how much it is very difficult to determine. 
From various inquiries it would appear that in general 
the advance began to take place in 1901 and that it 
continued throughout the whole of the remainder of 
the period until 1909. The advance of rent appears to 
have been checked in 1911 or 1912, owing to the in- 
crease of building. Advances have, however, varied so 



314 ECONOMICS 

widely in different centres that it is impossible to give 
any figures which would fairly represent the general in- 
crease. 

The costs of house building have increased materially 
owing to the advance of the wages of skilled labor and 
to the great advance in the price of lumber (another ex- 
tractive industry). The index number of lumber was, 
in 1892, 104; in 1897, 164, and in 1909, 154. The 
prices of all fuel have, on the whole, varied slightly 
from the average, but furnace coal exhibited violent 
fluctuations during the period, as follows: 

1890 1892 1894 1896 1898 1900 1902 1904 1906 1908 1909 
122 106 62 110 98 156 158 97 157 100 116 

Coal oil (U. S. standard) fell from 111 in 1892 to 69 
in 1908 and 1909. 

The cost of the necessaries of life appear thus to have 
advanced materially during the past twenty years; but 
they have not advanced uniformly. So far as may be 
gathered from the scale of general prices — that is, the 
scale of the bulk of the commodities which enter into 
consumption, not merely of a domestic but also of a 
productive character — ^the present period compared with 
the past periods is, however, not a period of high prices; 
but from about 1896 it has been a period of rising prices. 
Even now, notwithstanding the advance in price which 
has taken place, the scale of prices is little higher than 
it was in 1886 when prices reached the lowest point 
which, until that time, they had reached in the present 
century. They were destined to reach a still lower point 
in 1896. 

290. Conclusion to he drawn. — The general conclu- 
sion may be hazarded that the sharpness of the advance 
since then, very much sharper than the decline from the 



CONSUMPTION FOR PERSONAL USE 315 

high prices of 1874s has disturbed the economic equili- 
brium and that this sharpness rather than the magnitude 
of the rise of prices has also disturbed the minds of the 
people. It is important to notice that in respect to 
agricultural products, in which the chief advance has 
taken place, there can be no question of the influence of 
trusts, while in most cases where the influence of trusts 
is supposed to be considerable, for example, in coal and 
in coal oil, prices have either not been materially altered 
or have fallen.^ A possible exception is the case of beef. 
Even, however, if the "beef trust" has manipulated the 
market in such a way as to control the price, which is 
open to doubt, the method of meeting this condition by 
a boycott, which appears to have been attempted, is by 
no means likely to attain the desired result. The higher 
the price of beef becomes the more inducement there is 
to produce it, and any artificial reduction of the price by 
means of a boycott, if such a measure were successful, 
would simply act as a deterrent and would tend to pre- 
vent capital and labor from embarking in the industry 
of cattle raising. 

It remains to be noticed that while some portion of the 
increased cost of living is undoubtedly due to the in- 
crease in the prices of some of the necessaries of life, the 
other element in an increase of the cost of living, namely, 
the increase in the standard of comfort, has also to be 
taken into account. This is a matter difficult to 
investigate from a statistical point of view. There ap- 
pears to be among dealers an impression that the price 
of clothes has not risen, but that the mass of the people 
wear better and more expensive clothes than they used to 
wear; and there is also the impression that their miscel- 

^ This is, of course, open to the suggestion that they might have been lower 
had it not been for the influence of the trusts. 



316 ECONOMICS 

laneous expenditure has increased considerably. We 
may, therefore, arrive at the provisional conclusion that 
at least some portion of the increase in the cost of living 
is due to the fact that the mass of the people demand 
and enjoy living at a higher standard of comfort than 
they enjoyed or demanded a few years ago. If this 
conclusion is correct, it accounts for at least some portion 
of the advance of prices through increased demand due 
to the increase in the standard of comfort. 



CHAPTER III 

PRODUCTIVE CONSUMPTION 

291. Consumption of natural resources. — Natural re- 
sources may be divided into three kinds : 

First, those resources which when once utiHzed are 
automatically renewed in a manner which makes the 
supply in effect continuous, although the quantity may 
not be unlimited — of this order is the power which 
may be derived from falling water and the resources 
in the water supply for other than power purposes. 

Second, those resources which are similarly auto- 
matically renewed but in a manner which makes the 
supply periodical, as the power which may be derived 
from the tides. 

Third, those resources which are also automatically 
renewed, but which are variable and uncertain in their 
supply in any particular area, as rain. 

Fourth, those resources, the supply of which may 
be made continuous, partly through uncontrollable 
and partly through controllable natural forces, as the 
breeding of fish in the fisheries and the preparation 
of the soil and cultivation of plants as in agriculture. 

Fifth, those resources which are sometimes replen- 
ished by natural forces, but which may be replenished 
by the appropriate application of labor and capital 
within a relatively long but not extremely long period, 
as the forests. 

Sixth, those resources which are not renewable by 
any agency within any measurable period of time and 

317 



318 ECONOMICS 

the supply of which, however relatively ample it may 

be, is nevertheless susceptible of exhaustion, as all 

minerals. 

These resources in the aggregate constitute the ma- 
terial part of the potentially productive capital of a na- 
tion, and each nation possesses all of them in a greater or 
less degree. Some nations possess, as well, other natural 
resources, the exploitation of which in one way or an- 
other contributes to the natural income. The chief nat- 
ural resource of Switzerland, for example, is the moun- 
tain scenery, which attracts tourists from other countries. 
The Grand Canyon of Colorado is a natural resource of 
a similar kind, as are the hot lakes and pink terraces of 
New Zealand. JMount Vesuvius may be considered as a 
natural resource of the same order. 

292. Conservation of natural resources. — Anxiety 
about the conservation of the natural resources of a 
country is chiefly concerned with the economical exploi- 
tation of these resources, which are non-renewable, or 
the supply of which is renewable only after a more or 
less extended period of time. It is, however, also con- 
cerned with the economical exploitation of those natural 
resources which afford several different kinds of utili- 
ties, in order that care may be taken that they are not 
exclusively utilized for some of these to the exclusion 
of others. For example, the preservation of the natural 
beauty of waterfalls, like the Niagara Falls, is held 
to be as desirable from the point of view of utility as 
the exploitation of the falls for the purpose of obtain- 
ing power, and thus a limit has been placed by interna- 
tional agreement upon the amount of water which may 
be drawn from the river above the falls for industrial 
purposes. 

Those natural resources which have mainly attracted 



PRODUCTIVE CONSUMPTION 319 

the attention of conservation commissions and associa- 
tions^ are mainly the forests, the fisheries and the min- 
erals. 

When industrial exploitation began vigorously in the 
United States, toward the end of the eighteenth cen- 
tury, the natural resources seemed limitless ; vast forests 
extended in every direction, and only the slenderness of 
the population, which afforded but a relatively small 
working force, seemed to stand in the way of unlimited 
exploitation. Mere abundance induced habits of ex- 
travagance so far as material was concerned. The rela- 
tively high cost of labor led to the invention of labor- 
saving devices, but there did not appear to be any reason 
for saving material. Time w as invaluable, but the abun- 
dance of material was even embarrassing. The forests, 
for example, were discommodities which had to be re- 
moved to make way for the cultivation of land and 
for the growth of cities. 

Conservation commissions have advocated the reten- 
tion of the balance of the national resources by the na- 
tional government and the careful granting of these for 
exploitation under a regulative system ; others have ad- 
vocated a campaign of education of the public, with a 
view to the adoption of increasingly stringent regulative 
measures ; others have appealed to the patriotism of the 
owners of coal fields in order to induce them to consider 
future generations; while still others have proposed to 
alter, by taxation, the existing conditions of exploitation. 
No doubt some or all of these measures would, if they 
were adopted, produce a series of reactions out of which 
there might eventually grow an increase in the "national 
dividend," but for our present purposes it is necessary 

^ The Commission of Conservation of the Dominion of Canada is an example 
of the former; the National Conservation Association, organized in the United 
■ States in 1909, is an example of the latter. 



320 ECONOMICS 

to inquire why it is that the conditions are as they are, 
as an indispensable prehminary to the serious discussion 
of means for their alteration. 

293. Exploitation of natural resources. — In new 
countries, Hke the United States and Canada, a rapidity 
of production greater than that of older countries is 
essential for the national existence. The reasons for this 
condition may be put as follows : in European countries, 
which may be taken as types of long-settled communi- 
ties, a large part, indeed by far the larger part of the 
social fixed capital (that is, capital invested in public 
buildings, roads and bridges) is the product of the labor 
of previous generations ; the capital invested in them has 
long been subjected to the process of amortization, and 
the sole social burden is the maintenance of the fabrics. 

In a new country there is, to begin with, no fixed 
capital and no organization of life. The early settler 
finds himself in a more or less constant struggle with 
nature. If he brings into the new country the desires 
of the old he may have to subject himself to enormous 
inconvenience to satisfy wants which, in organized life, 
are among the most common and most easily satisfied. 

While driving on the Northern Canadian prairies in 
1904 the writer encountered on the trail, about 150 miles 
from the nearest railway station, a boy driving an empty 
ox-wagon. The boy was 50 miles from his home and 
the same distance from the destination. The latter was 
a small town in which he was going to buy a few pounds 
of sugar, wanted for the use of the household to which 
he belonged. At the usual rate of progress of an ox — 
20 miiles per day — ^the boy expected to accomplish his 
journey of 200 miles in a fortnight, leaving four days 
for rest. A farmer's wife at an even greater distance 
from a town or a railway station complained at the 



PRODUCTB'E COXSUMPTIOX 321 

same period to the writer that the nearest shop was more 
than 100 miles away. 

The absence of organized hfe is, of coiu-se, felt more 
or less acutely in proportion as the settler has been 
accustomed to it. wearied of it. unacquainted with it, or 
indifferent to it. ]VIost of the European settlers in Amer- 
ica, at all epochs, have been accustomed to some kind 
of orp^anized hfe. while manv of them have misrated 
from cities. Demand for the conveniences of hfe is 
thus long antecedent to the full .supply of them. 

At the beginning of the settlement of a new country 
it is indispensable that the most necessary of the forms 
of socially usable capital should be obtained as soon as 
possible. Therefore, compared with those to which the 
settlers were formerly accu.stomed, they must be crude. 
The easiest and quickest method is the best. The only 
consideration is satisfaction of the inomediate want. The 
first house is a "'shack'' of logs, trees being remorselessly 
felled for the purpose. If the only available tree near 
the site is walnut or mahogany it is used without con- 
sideration of its exchange value under other conditions. 
Thus in the early settlement of parts of Ontario, walnut 
was used for ordinary building purposes and even some- 
times for fences. Tn the construction of the Cuban 
Railway at least one bridge was built of mahogany be- 
cause that was the only available wood in the neighbor- 
hood of the site. 

As time passes and the population increases, social and 
private capital grow together. The generation of early 
settlers passes away but leaves behind it for the inheri- 
tance of the next generation an unexhau>sted balance of 
utilities. The new generation utilizes this balance, ex- 
hausts some of it and adds to it and so on. The prospect 
of extensive natural resources to which access is given 
c— I— 21 



322 ECONOMICS 

more or less freely (as by homestead laws and the like) 
induces immigration, and the new immigrants pass 
through the same phases as the earlier settlers. 

Peasants from Galicia and Bukovina in Eastern Aus- 
tria, for examj)le, have left the villages in which they 
lived in comparative comfort — their houses being more 
or less well built — to live for a time in Canada in dug- 
outs.^ So soon as they could accumulate sufficient sav- 
ings, or so soon as they could establish credit sufficiently 
to borrow the necessary amount, they purchased timber 
and built houses for themselves, or they hired horses, cut 
down the timber on the government lands and drove it 
to their settlements for building purposes. 

294. Settlement in a new country. — If settlers have 
to rely entirely upon their own exertion, apart from any 
possible aid from external sources, their progress to- 
wards comfortable and stable settlement, even though 
they are industrious, may be slow. It may be greatly 
increased in rapidity, although it may be rendered less 
stable, by borrowing capital with which they purchase at 
once the means of establishing themselves and of en- 
gaging immediately in agricultural production instead 
of providing makeshifts. 

It is entirely possible for a farmer who is accustomed 
to hardship and who has the necessary skill of various 
kinds to establish himself without any external aid and 
without any capital to begin with; but the process re- 
quires a very vigorous constitution and frequently has 
its victims. Such a farmer would live on natural fruits 
and roots while he is finding the materials for and mak- 
ing makeshift agricultural implements. Exchange of 
wild fruits and herbs gathered by him would procure 

^The "dug-out" is a square hole in the ground about six feet deep and of 
varying dimensions otherwise, roofed with a peak roof made of poles and coated 
over with clay. 



PRODUCTIVE CONSUMPTION 323 

seed potatoes, the quickest crop, and when his potato 
crop appeared, the major part of the troubles for such 
a man would be over. Almost precisely this course has 
been adopted by some of the Eastern European peasants 
who have settled in the Canadian Northwest. One 
group found large supplies of Seneca Root which they 
were able to sell for a sum sufficient to enable them to 
facilitate their establisliment very materially. Their 
knowledge of herbs was in effect, as it proved, a part of 
their capital. 

Cases in which the new settler has knowledge enough 
and self-control to attempt to establish himself in a new 
country without capital are rare, and thus borrowing be- 
comes a practice, a m.atter of necessity. The settler also 
is rarely satisfied with the amount of land, generous as 
it is, which he obtains as a free grant ; he wants to buy 
more land, and for this purpose he borrows upon the 
security of the land which he has received gratuitously 
and which he has improved. 

Communities of settlers, especially those that have 
transferred themselves into a new country from the or- 
ganized life of an old one, feel acutely the want of social 
and personal comforts to which they have been habituated. 
They thus embark the credit of the community upon the 
provision of water supply, electric lighting, street rail- 
way systems, civic buildings and the like in order that 
they may possess these comforts. Public and private 
borrowing cannot be conducted continuously without 
the payment of interest. Indeed, capital cannot be 
tempted out of its customary channels into distant and 
imperfectly known regions, without the inducement of 
a higher rate than can be obtained in the larger, better 
known markets. 



324 ECONOMICS 

Thus borroiwing, public and private, involves increas- 
ing annual interest payments. The community must, 
therefore, tax itself to meet the public charges, and it 
must exercise its individual industry actively in order 
to meet at once its public and its private obligations. 
Repudiation of interest charges would lead to an im- 
mediate check in the inflow of capital, as it always has 
done in such cases, and this check would affect not only 
those municipalities or states which had repudiated but 
all others because a new element of risk would be in- 
troduced and would have to be compensated for. 

The relatively high rate of interest which obtains in 
new countries and especially in the outlying parts of 
these is due partly to the difficulty of inducing the lend- 
ing of capital in remote places because of the great pro- 
portionate risk under any circumstances, and partly be- 
cause of the greater cost which compulsory recovery 
involves in isolated as compared with settled regions. 

If the argument has been followed, it will now have 
become apparent why the United States and Canada 
must be occupied by people who work hard for an im- 
mediate return. The payment of interest cannot be 
postponed without serious, ulterior economic effects. 
The accumulated capital of the United States is not yet 
sufficient to enable it to avoid borrowing abroad without 
greatly restricting the rapidity of its development, the 
rapidity of its development being due in a great measure 
to the capital which it has borrowed from abroad. 

295. Effect of legislation upon the horrotdng of 
capital. — A sudden restriction of its industrial enterprise 
through legislative interference with the object of im- 
posing a check upon the exploitation of the natural re- 
sources, if such legislation were effective, would have the 
same result as a restriction of the supply of capital 



PRODUCTIVE CONSUMPTION 325 

through a rise in the rate of interest. Indeed, such legis- 
lation, by diminishing the inducement for capital to go 
into such enterprises through the check imposed upon 
immediate returns, would have the effect of diverting 
capital from enterprises of this nature or from the coun- 
try altogether. 

It is true that the existing invested capital could not 
be removed and that if a confiscatory policy (to take an 
extreme case) with regard to the investments of for- 
eigners were to be adopted, these investments would be 
purchased at reduced prices by native speculators. It 
would, however, also be true that not only would subse- 
quent supplies of foreign capital be repelled but native 
capital would tend to be invested abroad because of the 
diminished security of investments. From these two 
causes the supply of capital would be diminished and the 
price of it enhanced. 

Such a reaction did occur in the United States in the 
early eighties when, owing to the repudiation of interest 
obligations by some small municipalities, doubts were 
thrown upon the credit of municipalities in general. The 
result was the sale of municipal securities by American 
and other investors, the investment of money abroad and 
the consequent advance of the rate of interest for all 
municipal borrowings. 

In respect to accumulated capital, Canada is in an 
even less developed position than the United States. The 
rapid development, especially between 1900 and 1912, 
was due largely to the investment and the temporary 
loan of external capital chiefly from Great Britain. In 
order to pay the interest upon this capital, very active 
production for an immediate return is necessary so that 
the stream may not be checked. 

296. Consumption of human life and energy. — From 



326 ECONOMICS 

the social point of view it is extremely important that the 
life of the community should be continued at as high 
a level as possible. The hmnan resources of a nation 
are, after all, its most important resources. Attempts 
have often been made to form estimates of the value of 
men considered in terms of capital. Every mature per- 
son has cost society a certain amount. He has enjoyed 
the protection and the services of the State. He has 
been educated largely or wholly at the cost of the State. 
He has been the cause of expenditure to his parents and 
to the public, during the whole period of his infancy and 
adolescence, and when he reaches maturity he may fairly 
be said to be a debtor for this amount, with interest and 
compound interest, if an exact calculation be made. It 
is, therefore, highly important to the community that 
each person who survives to maturity should survive 
long enough to enable him to repay this substantial debt 
by means of production of one sort or another. If his 
energy is worn out prematurely by too exhausting labor, 
or if for any reason he succumbs before the debt is paid, 
the community loses. 

297. Reactions of consumption upon production. — 
Consumption reacts upon production from the movement 
of the population, from changes in the standard oif 
comfort and from other causes, and results either in di- 
version or in net increase or diminution of demand. For 
instance, increase in the demand for cotton, due to the 
requirements of the Russian and Japanese soldiers in 
Manchuria (quilted cotton being the customary winter 
clothing of the region in wliich the campaign was 
fought), led to an increased production of both cotton 
and wool, and the high price of woolen yarns led to 
change in the production of mixtures of woolens and 
cottons, more cotton yarn being employed to replace 



PRODUCTIVE CONSUMPTION 327 

the more expensive woolen yarn. The effect of the cam- 
paign in this particular connection was to divert demand 
in the case of the commodities in question. 

The emigration of large numbers of agricultural la- 
borers and of artisans from Italy to the United States 
diminished consumption in the smaller towns in Italy 
and reacted upon the production of the villages, until the 
advance of the standard of comfort in both, owing to 
the influx of the savings of the emigrants, led to an in- 
crease of consumption and production alike. 

An increase of consumption of a commodity will oc- 
casion in the first instance an advance in the price of it 
and then an increase in the production. The increase in 
the production will not only tend to diminish the price 
to the consumer, but a more wholesale method of produc- 
tion will diminish the cost of it to the manufacturer. 
A change in consumption may also bring into promi- 
nence a large number of new commodities and cause the 
practical disappearance of others. Examples of this 
phenomenon have been indicated in discussing the effect 
of change of fashion upon prices. 

298. Reactions of distribution tqjon consumption. — 
When any of the elements in distribution increases or 
diminishes in amount, there is normally an increase in 
consumption of the class to which the element in ques- 
tion belongs. When there is an advance in rent, interest 
or wages, the landowner, the capitalist or the laborer 
who receives that advance not merely customarily in- 
creases the total of his expenditure but diverts his con- 
sumption from one commodity to another. A landowner 
whose rents have risen may enlarge his house or build 
a new one, and a capitalist who finds himself in the en- 
joyment of a larger income in consequence of a rise in 



328 ECONOMICS 

the rate of interest may discard his carriage and horses 
and begin to use an automobile. 

When wages advance, the reaction upon consumption 
is ahnost immediate, the standard of comfort rises, 
greater variety and quantity of food are demanded, bet- 
ter clothing and larger or more comfortable houses. 
When Visages fall, the contrary effects are produced. 
When wages are at a low level, the workers consume 
large quantities of bread; when wages advance, they 
adopt a more varied diet. During the recent years of 
relatively high wages, the quality of the clothing cus- 
tomarily worn by working people has risen sharply. 
This improvement in quality accounts in a large measure 
for the increased cost of clothing in individual budgets 
because textiles have not shared in the advance of prices. 

299. Heactions of coiisumytion and exchange. — The 
reactions of consumption upon exchange have already 
been discussed in connection with price movements. 
Here it may be noticed that price movements have an 
important effect upon consumption. The first effect of 
an advance in price is normally a diminution in con- 
sumption. Those consumers who are just able to af- 
ford a weekly consumption of, let us say, five loaves of 
bread when bread is at ten cents per loaf, will, if their 
resources remain unaltered, be unable to afford more 
than four loaves if the price advances to twelve and a 
half cents per loaf. Those consumers who are just able 
to afford five loaves plus the equivalent of one more loaf 
in miscellaneous food will have the option of cutting off 
either the miscellaneous food or one loaf; they cannot 
afford both. 

Thus an advance in the price of bread will lead to 
diminished consimiption of bread and also to diminished 
consumption of other foods. If, on the other hand, 



PRODUCTIVE CONSUMPTION 329 

the prices of miscellaneous foods advance out of propor- 
tion to the price of bread, the consumption of bread will 
increase and there will be a tendency for the price of 
bread to rise. During periods of depressed trade and 
low wages, bread is consumed to a much greater extent 
proportionately to the total expenditure than during 
periods of high wages. The price of bread, therefore, 
may be maintained even during a period of depression on 
account of this fact. 



PART V: THE ECONOMIC ASPECTS 
OF THE STATE AND MUNICIPALITY 

CHAPTER I 

PROTECTION AND FREE TRADE 

300. Laissez-faire. — The most important applications 
of the principles of production, exchange, distribution 
and consumption, discussed in the previous pages, are 
found in the relations between industry and government. 

The State may refrain from interfering with either 
industry or commerce. Such an attitude results in what 
has been called laissez-faire from a maxim of the 
physiocratic writers of the eighteenth century. Even, 
however, if the State refrained from interfering with 
industry and trade, its activities would, nevertheless, in- 
fluence the magnitude and direction both of production 
and exchange ; for instabihty in external relations or in 
interior social order would affect industry and commerce 
more or less profoundly. 

The policy of laissez-faire in a strict sense, has never 
been adopted by any of the modern commercial nations. 
It has been customary to apply the expression in a col- 
loquial and inexact sense to Great Britain during the 
period from about 1830 until about 1870. This was the 
period of the initiation and development of free trade; 
but it was also the period of the growth of the factory 
acts. The subsequent period from 1870 until the pres- 

331 



SS^ ECONOMICS 

ent time has also been a period of free trade ; but it has 
been characterized by an unprecedented amount of pa- 
ternal legislation. 

The gromids of objection to the interference of gov- 
ernments with industry and commerce are that the gov- 
ernment is less likely to know what should be done in the 
case of a j^articular industry than the persons who carry 
it on; that the consumer or buyer may generally be 
trusted to look after his own interests; and that if he 
were not to be trusted the intervention of the State would 
be inexpedient, because it would tend to destroy or to 
prevent the growth of self-reliance. The doctrine grew 
at a time when the State was not conspicuous for the 
competence of its functionaries, and when remorseless 
exploitation of the people by the State in industrial en- 
terprises had assumed great importance, as in Kussia, 
for example — especially from about 1720 until 1750. 
The doctrine of laissez-faire assumes prominence as a 
reaction whenever, either under an absolute or under a 
democratic rule, the State threatens to absorb industrial 
enterprises and to exploit the labor of the people. 

301. Regulating foreign trade. — The State may at- 
tempt entirely to prevent foreign trade by means of de- 
crees or enactments, as in the case of the Berlin Decrees 
issued by Napoleon I as a war measure against Great 
Britain. 

On the other hand, the State may attempt to exclude 
by means of very high tariffs, which have the effect of 
prohibiting the importation of all or some commodities 
which might be imported if there were no prohibitory 
tariff. Such prohibitory tariffs are generally retaliatory, 
that is, they are imposed for the purpose of forcing com- 
mercial or political concessions from other nations. 
They may, however, be intended for the purpose of pro- 



PROTECTION AND FREE TRADE 333 

tecting native industries by imposing so high a duty that 
importation is impossible. If they are accompanied by 
measures which have the effect of encouraging exports, 
prohibitory duties may induce importation of gold for 
the purpose of creating a reserve, or for the rehabilita- 
tion of the paper currency, as in Russia, Austria and 
Italy. 

302. Protective tariff. — A protective tariff is not 
necessarily prohibitory. It is intended to afford pro- 
tection to the native manufacturer up to a certain point 
■ — that is, it limits the price at which imports will usually 
take place by the imposition of a duty, which is cus- 
tomarily assumed to bring the price of the foreign com- 
modity plus the duty to the point at which the na- 
tive manufacturer can compete with the foreign trader 
in approximately equal terms, a slight advantage being 
deliberately arranged in favor of the native manufac- 
turer. Protection of this character does not necessarily 
limit competition except in so far as it does sometimes 
have the effect of excluding the foreign trader. It may 
be held that protection, by encouraging the establish- 
ment of manufacturing enterprises, may eventually in- 
crease competition within the nation. Experience has, 
however, shown that in countries which are committed 
to the policy of protection, one or both of two conse- 
quences ensue. Either the tariff is increased in order 
to prevent the domestic competition from reducing the 
price to a point at which the foreign exporter can enter 
into competition or the competitive manufacturers com- 
bine and form a trust. The trust under these conditions 
supplements the regulation of the tariff and neutralizes 
the competition to which the development of domestic 
industry, aided by the tariff, has given rise. If, however, 
the trusts compete with one another, to the extent that 



334 ECONOMICS 

the price is diminished to the point at which the foreign 
explorer can enter into competition, the price may be 
farther depressed unless the tariff again becomes protec- 
tive by being increased. 

The principle upon which the effect of tariffs upon 
prices may be determined has already been explained 
(p. 186) . The more general effects under the conditions 
discussed briefly. A tariff system under the conditions 
of a rapidly developing modern nation has an obvious 
tendency to become very intricate because it must follow 
the increasing intricacies and inter-relations of industry 
and commerce. If it did not do so, the law of substitu- 
tion would render it of no effect. As the values of goods 
alter in relation to one another the tariffs must follow 
these alterations; otherwise the manufacturers of some 
goods would be deprived of their protection while those 
of others would be over-protected. 

The increasing intricacy of the tariff and the apparent 
or alleged need for frequent revision makes it notably 
a political issue. The effect of this condition is that the 
Government is drawn into the vortex of commercial re- 
lations. At one moment the interests of commerce are 
sacrificed to political exigency, while at another moment 
the wider political interests are sacrificed to commercial 
exigency. The interests of the two fields of politics and 
commerce are not identical because the first concerns 
what are assumed to be the permanent interests of the 
nation and the latter what are, in general, the temporary 
interests. 

303. Tariff for revenue. — A tariff, no matter what 
its intention may be, acts as a protective measure unless 
it is offset by an excise duty upon native manufactures. 
It may, however, be a tariff for revenue only if it is im- 
posed exclusively upon goods which cannot be the sub- 



PROTECTION AND FREE TRADE 335 

jects of domestic manufacture. The tariff of Great Brit- 
ain imposes import duties upon certain commodities, 
which are also produced within the country, offsetting 
these duties by similar duties of excise, and imposes im- 
port duties upon certain commodities, like tea, which can- 
not possibly be produced within the country. The tariff 
of Great Britain is thus deliberately non-protective. It 
is imposed exclusively for purposes of revenue. 

A tariff for revenue of this kind cannot, however, form 
the sole or chief source of the national income. It must 
in practice depend chiefly upon the duties on excisable 
liquors and on a small number of commodities. Experi- 
ence has shown that such sources of revenue cannot be 
relied upon to produce a stable income. They must be 
supplemented by other sources, of which mention has 
been made in another place (p. 185) . 

304. "Free trade" in Great Britain. — The State may 
impose no tariff except upon excisable goods or it may 
impose neither customs nor excise duties. A policy of 
this kind would be a policy of free trade in the strict 
sense. No nation adopts this policy. The nearest ap- 
proach is made by Great Britain, which, however, as we 
have seen, really imposes a tariff for revenue. The same 
is true of India. 

The near approach of Great Britain to a policy of free 
trade strictly so called is due to the following historical 
circumstances. The important inventions and improve- 
ments of mechanical appliances which were made in the 
eighteenth and in the early part of the nineteenth cen- 
tury were not only made in Great Britain, but the ex- 
port of the machinery made under these inventions was 
forbidden, and so far as possible effectively prevented. 
But these inventions could not have been utilized had 
there not existed in Great Britain a class of free hirable 



S36 ECONOMICS 

laborers, which at that time ^ did not exist in any consid- 
erable numbers in any other country. This class was free 
of obligations of the kind generally known as feudal — 
susceptible of being hired by any one and more or less 
mobile. The class was greatly re-enforced by the decline 
of agriculture, which took place upon the importation of 
foreign grains in spite of the duties which were then in 
force. These grains were imported largely from the con- 
tinental ports in the earlier and from the United States 
in the latter part of the period. 

When, under the pressure occasioned by the potato 
famine in Ireland, and by the fall of prices and the stag- 
nation of wages in the early forties, the corn laws were 
repealed and the duty upon wheat gradually removed, 
agriculture was rendered still more unprofitable and the 
class of hirable laborers was still further re-enforced by 
the stream of unemployed agricultural laborers. 

These conditions were contemporaneously almost abso- 
lutely reversed in the United States. There agriculture 
was a profitable industry, land was cheap and fertile. 
Grain could be produced in competition with the Euro- 
pean farmer at a price that secured the market. Capital 
was attracted by the prospect of large profits from agri- 
culture and the exploitation of raw materials, chiefly 
timber. Wages were high, the consumption of the work- 
ing population came to so high a level that demand for 
commodities increased and prices rose. In the thirties of 
the nineteenth century every traveler in the United 
States was struck by the enormous activity. Yet this 
activity was concerned almost exclusively with primary 
exploitation and with trade ; industry had hardly begun. 

Great Britain, on account of the causes indicated 
above, had thus a great start in industrial development. 

^ Approximately between 1775 and 1830. 



PROTECTION AND FREE TRADE 337 

And the advantage which that start gave was maintained 
long after other nations entered upon the industrial 
phase. In many important industries, especially in ship- 
building, the advantage is still maintained. 

The population of the industrial centres has become 
a highly skilled population, partly through hereditary 
influences and partly through practically continuous em- 
ployment in industries requiring technical skill. The 
engineers and ship-builders of the Tyne, the Clyde and 
the Mersey, long ago acquired the skill which they have 
retained and developed, so that on these rivers is built 
the larger part of the ocean shipping of the world. 
Under the influence of this advance in ship-building and 
under the influence of early navigation acts and their 
reactions. Great Britain has retained, in a large meas- 
ure, the position she obtained as the chief ocean car- 
rier. 

Thus, because of her large industrial population, and 
because of her carrying trade, the income from which 
forms a considerable portion of the total national in- 
come, it was at once possible and indispensable for her 
to adopt, and it has been indispensable for her to main- 
tain, a policy of free trade. Indeed, her manufactures, 
which did not need protection when they were young 
industries, have really never had the experience of pro- 
tection, and with few exceptions her manufacturing in- 
terests have never advocated it. 

305. ''Fair Trade" movement. — During the "long de- 
pression" from 1876 till 1886, a movement sprang into 
existence known as the "Fair Trade" movement. This 
was simply another name for protection ; but when trade 
revived in 1886, the agitation subsided and nothing was 
heard of the subject in political spheres until the later 
agitation for "Preferential Trade." This agitation was, 

c— I— 22 



338 ECONOMICS 

however, deprived of its force by causes similar to those 
which put an end to the previous movement, that is to 
say, by a revival in trade. 

It remains to be said that, in the event of the present 
sources of taxation in Great Britain being found to be 
inadequate to sustain the burden of public expenditure, 
an expanded tariff for revenue might have to be de- 
vised; and further that, if, owing to the adoption of 
free trade or of even quasi-free trade by the United 
States, the costs of production of any considerable num- 
ber of manufactured articles were diminished in conse- 
quence of the adoption of that policy, it might be urged 
upon British statesmen with a cogency which could not 
be resisted, that the manufacturing interests of Great 
Britain ran risk of being ruined by American competi- 
tion. On the other hand, the fact that the major part 
of industrial production in Great Britain is for export, 
renders it inevitable that foodstuffs, raw materials and 
partially manufactured goods must be imported by that 
country, duty free. 



CHAPTER II 

REGULATION OF DOMESTIC TRADE 

306. Municipal regulation. — The regulation of indus- 
try in the Middle Ages was mainly an affair of the mu- 
nicipality. The rates of wages were fixed and employ- 
ment at these rates was often made compulsory, while 
the privileges of trading within certain areas were re- 
served by the burgesses of the towns. The stringency 
of the regulations and the effectiveness of the quasi- 
monopolies which they involved led to appeals by those 
who were excluded from trading privileges to the State 
or the larger unit of administration. The pretensions of 
the towns were held in check by the curtailment or the 
abolition of their privileges, and the State either threw 
industry and trade open to unrestricted competition or 
it adopted regulative measures to replace those of the 
municipalities. Occasionally, the State confirmed a mu- 
nicipality in the possession of some privilege or in the 
power of enforcing some of its regulations. The cen- 
tralization of administrative authority, in which France 
led the way in the eighteenth century, enabled the State 
to exercise regulative power over industry much more 
effectively and with much more uniformity than the mu- 
nicipalities had been able to accomplish. 

307. State regulation. — Legislation intended to pre- 
vent "engrossing" or, in more modern phrase, "corner- 
ing the market," to prevent the use of false money and 

339 



340 ECONOMICS 

false weights and measures, and to prevent adulteration 
of goods, is found in many countries. When the fac- 
tory system developed, humanitarians urged the regu- 
lation of the hours of labor of women and children and 
of the conditions of labor in general. In spite of the 
opposition of those who doubted the wisdom of state 
regulation of industry on theoretical grounds and of the 
opposition of some of the manufacturers, and in spite of 
the apathy of the working people, the Factory Acts were 
passed in Great Britain. Then came the Mines Act for 
the regulation of mines and other acts of a like character. 
Legislative measures regulating industry in this sense 
were gradually adopted by all countries, beginning about 
1840. In the United States, factory legislation is the 
prerogative of the several States, and its character, there- 
fore, varies. In general, however, the English legisla- 
tion has been taken as a model. In Canada, such legis- 
lation is in the hands of the provinces; and here, also, 
the English model has been followed by Ontario. The 
other provinces, although not highly developed indus- 
trially, have in the main followed the example of that 
province. 

The factory system greatly facilitated the control of 
industrial conditions by the State. The most reliable 
contemporary authorities agree that prior to the wide 
extension of the factory system, the conditions under 
which labor was carried on were sometimes extremely 
bad. The labor of children was, for example, remorse- 
lessly exploited even by the parents of the children, both 
in Great Britain and in the United States. Indeed, labor 
carried on domestically is extremely difficult to regulate 
without an amount of interference with domestic privacy 
which would be impracticable. The factory system, not- 



REGULATION OF DOMESTIC TRADE 341 

withstanding its drawbacks, is probably an improvement 
upon the system which it largely supersedes. 

308. Arguments for and against. — The general argu- 
ments in favor of state regulation of industrial condi- 
tions are : that the laborers are not, as a rule, able to in- 
sist upon the improvement of the conditions under which 
they work, even if such improvement is strongly advis- 
able; and that social injury results from the deteriora- 
tion of laborers when they are exposed to unhealthful 
conditions. The question of factory hygiene is, however, 
a part of the larger question of public health, generally, 
and the development of factory legislation has been coin- 
cident with a generally increased regard for public 
health. 

The arguments against factory legislation are of wider 
application. They are directed against all legislation 
which in any way infringes upon the liberty of the indi- 
vidual. On this ground, Herbert Spencer and Auberon 
Herbert objected to nearly all the laws on the statute 
books of modern nations. They held that these laws 
involved restraints which led to a "new slavery" to the 
State and the complete subjection of the people to a 
horde of functionaries engaged in the administration of 
laws subversive of liberty. 

While these may be counted extreme views, there can 
be no doubt that one of the dangers incurred by the 
adoption of an extensive and intensive system of regula- 
tion of trade and industry is the inevitable growth of a 
bureaucratic class which may become burdensome and 
even oppressive. Factory legislation has, however, until 
the present time, as a general rule, been confined osten- 
sibly to those industries in which women and children 
are employed, adult men being only thus indirectly af- 
fected. The ground of the distinction is that adult men 



342 ECONOMICS 

are better able than women and children to insist on 
what they regard as proper treatment. The distinction 
is not maintained in the Mines Acts, which are based 
upon provisions for the safety of workers, irrespective 
of their sex or age, nor can it be really maintained in 
factories where men, women and children are employed 
together. 

309. Miscellaneous state regulations. — The compara- 
tive failure of industrial combination to achieve by itself 
any great improvement in conditions had led the working 
class to demand legislation for the purpose of limiting 
the hours of labor. The struggle for a statutory eight- 
hour day, which has been going on for at least fifteen 
years in nearly all the European countries,^ has been 
most acute in those countries in which the organization 
of labor has been least effective. There has, however, 
been in progress throughout the working class in all the 
industrial countries, an internal struggle between those 
who desire a larger share of political power in general 
for the working class and those who advocate the acqui- 
sition of benefits (like the eight-hour day) from govern- 
ments under the existing political systems. 

In addition to such interference with domestic trade 
and industry, nearly all States encourage invention by 
the granting of patents or temporary monopolies, and 
some States grant bounties upon manufactures. Can- 
ada, for example, grants bounties upon the manufacture 
of pig iron. Some States give direct bonuses to indus- 
tries, and some municipalities grant land and cash 
bonuses, together with immunity from local taxation, for 
a period of years. This practice is extensively adopted 
b}^ Canadian municipalities. 

^ An important incident in the Russian revolutionary movement of 1905-6 
was the struggle for an eight-hour day. 



REGULATION OF DOMESTIC TRADE 343 

In the case of states, the practice of granting bonuses 
to industries is not undiluted by the spirit of competi- 
tion with other states, as the practice in the cases of the 
towns is deeply imbued with the spirit of rivalry between 
them. It is not unusual for towns to compromise their 
municipal credit by excessive granting of bonuses. 
When these have reached a certain aggregate amount, 
the burden of taxes becomes so heavy as to affect the 
local labor market. Under such circumstances, the 
bonused factory owners must pay the taxes through their 
wage bill, otherwise they would be unable to obtain la- 
borers. 

310. Control of quasi-monopolistic enterprises^ — The 
most important series of regulations of the sort apply- 
ing to specific classes of enterprises are those which 
relate to enterprises which in their nature are of a quasi- 
monopolistic character. Among these the most conspic- 
uous are banks, insurance companies, railways, electric 
lighting companies, telephone companies, express com- 
panies and the like. The feature which all of these en- 
terprises have in common is that each of them comes in 
contact with verj^ large numbers, and in some cases 
practically with the whole of the public. This fact is 
the fundamental reason for attempts to regulate such 
enterprises and their predecessors in all ages. The serv- 
ice of the post (which corresponds to the modern rail- 
way) was regulated in Ai^abia at least as early as the 
tenth century. The services and charges of watermen, 
chairmen, and the like, were regulated throughout Eu- 
rope from remote times as the services and charges of 
similar persons have been and are regulated throughout 
Asia. 

The fundamental reason for such regulation is not the 
monopoly of the service, for many regulated services 



344 ECONOMICS 

are not monopolistic and many quasi-monopolies are not 
regulated. The reason is the universality of the demand 
for the service. 

311. Banks. — The regulation of banks by the limita- 
tion of their right to lend money, by the limitation of 
their right to issue notes, by the requirement that they 
should publish summaries of their periodical balance 
sheets in a certain form, by provision for the inspection 
of their financial position and the like, is intended for 
the protection of the public, all of whom are assumed to 
avail themselves of the services of banks in one form or 
another. Thus, regulation of banks exists in all coun- 
tries in respect to some or to all of these particulars. 

In Canada the charters of all chartered banks expire 
at the same time, and are all simultaneously renewed 
by a decennial Bank Act. While anyone may start a 
bank, only chartered banks can issue notes. They are 
permitted to do so to an amount equivalent to the amount 
of their capital stock. Chartered banks are not required 
by law to maintain specific proportions of reserve to lia- 
bilities, but they must hold a certain proportion of their 
reserve in "legal tenders" of the government. Against 
these "legal tenders" the government holds gold, so that 
the government really holds a certain proportion of the 
reserve of the banks. 

312. Hesponsihility of government. — When the gov- 
ernment undertakes duties of the kinds specified in its 
acts, there is an implied obligation that these duties will 
be efficiently performed. In most countries there is an 
express provision in the law that the government cannot 
be sued in its own courts without leave from its own law 
officers. Such leave is never wisely withheld ; because if 
it is refused, confidence in the justice and good will of 
the government must be diminished. Whether such leave 



REGULATION OF DOMESTIC TRADE 345 

is granted or not, it is clearly incumbent upon the gov- 
ernment to conduct its affairs with at least the regard 
for honor and justice customarily expected from its own 
citizens. The government, therefore, which undertakes 
to regulate, must inevitably do so or take the conse- 
quence. The consequence to a government which 
owes its position to a popular vote is that it may be 
dismissed. 

An interesting example of recognition of an implied 
contract with regard to regulation of banks is to be 
found in the undertaking of the Canadian Government 
to compensate in some measure the depositors in a cer- 
tain defaulting bank, on the ground that due precau- 
tions were not taken in the granting of the original cer- 
tificate to the bank when it applied for its charter. 

313. Disadvantages of government control. — The 
principle of responsibility of the government for the 
effectiveness of regulation is of wide application, but it 
seems an inevitable corollary of the regulative function. 
One of the arguments against governmental regulations 
is that it renders people careless about their own inter- 
ests, and that it causes them to rely upon the go^' erim;ient 
to look after them. Experience shows that this argu- 
ment is to a large extent valid; that in point of fact, 
people who have not the means nor the skill to satisfy 
themselves on so intricate and difficult a question as 
the stability of a bank, e. g., rely upon government regu- 
lation. It seems inevitable that the government should 
share the risk which a guarantee insurance company 
would share under similar circumstances. If the fees 
which the government receives should not admit of its 
bearing this risk or a share of it, the fees would require 
to be increased. Regulation which does not regulate 
is costly to the community at any price, 



346 ECONOMICS 

314. Regulation of railways. — The most conspicuous 
example of government regulation of special classes of 
enterprise is the regulation of railways. This is effected 
by various means. In England the railways are regu- 
lated partly by general acts, and partly by specific acts 
in respect to individual companies. The administration 
of these acts is entrusted to a Railway Commission and 
to the Railway Department of the Board of Trade. The 
former deals with disputes between railways, although 
these may also come before the Law Courts, and with 
disputes between the railways and the public, although 
these also may be made the subject of ordinary legal 
procedure; the functions of the latter are chiefly to ad- 
minister the acts relating to safety appliances and the 
like, to hold inquiries into accidents and to act as inter- 
mediary between the public and the railways in case of 
need. 

In the United States, the railways are regulated partly 
by State Railroad Commissions and partly by the In- 
ter-state Commerce Commission. The former deals with 
questions arising within their respective states and the 
latter with those questions which relate to traffic be- 
tween one state and another. 

In Canada the railways are regulated partly by Pro- 
vincial Commissions, as in Ontario, but chiefly by the 
Dominion Railway Commission. This Commission 
deals with all questions relating to railways. It ap- 
proves and disapproves of rates submitted to it by the 
railway companies; and when these are approved they 
cannot be altered without notice. It decides questions 
of terminals and the like, and may within very large 
limits order the railway companies to do certain things.^ 

315. Economic effect of railway control. — The eco- 

^See also the section on "Traffic," Volume III of tbe Modern Business text. 



REGULATION OF DOMESTIC TRADE 347 

nomic effect of the regulation of railways may be briefly 
considered. Although the function of regulation of rail- 
ways was primarily urged upon the State by the trading 
public with the expectation that by some means the State 
might diminish the cost of railway transportation, it is 
doubtful whether this expectation has been realized to 
any material extent. In some cases, no doubt, where 
the rate charged by the company has been a rack rate 
— that is, a rate which was the highest rate which could 
be charged under conditions of effective monopoly — such 
a rate has been reduced by the action of a commission. 
But whether rates in general are lower than they would 
have been without any commission, is an extremely diffi- 
cult question to answer. 

If we assume that until the present, rates in general 
have been materially reduced below the point to which 
they would have been reduced by the railway companies 
spontaneously, we must conclude that the profits of rail- 
way enterprise have been also reduced. In that case 
it must be more difficult than it would otherwise have 
been to induce the investment of capital in railway 
enterprise. A check upon investment of capital means 
restriction of competition, and restriction of competition 
means relatively high rates. It might therefore be 
argued that government regulation of railways, in so 
far as it is effective, is not necessarily productive of a 
net diminution of the cost of transportation as a whole 
and over a long period. 

A conclusion of this kind must, however, in the 
absence of sufficient data, be regarded as provisional. 
The regulation of railways in so far as it is concerned 
with compelling them to use safety appliances, how- 
ever pecuniarily costly such regulation and its effects 
may be, may well be regarded as socially advantageous 



348 ECONOMICS 

because it tends to diminish the number of railway acci- 
dents. 

316. The regulation of trusts. — The most conspicu- 
ous example of government regulation of special fea- 
tures which occur in many enterprises is the regulation 
of "trusts." The expression "trust," as widely used in 
the United States, appears to have derived its special 
application to the form of industrial combination, which 
it now imjiilies, from the Standard Oil Trust which was 
formed in 1882. This trust united, by means of a formal 
agreement, the large number of oil companies which 
had previously formed an "alliance." The original 
"alliance" was formed for the purpose of securing 
transportation for the product of its constituent com- 
panies by means of pipe lines and by means of agree- 
ments with the railways companies to carry the oil at 
reduced rates. Other combinations of oil companies 
were formed at the same time as the "alliance." Be- 
tween it and the most important of these combinations 
there was a prolonged struggle which lasted until 1877, 
when the opponents of the Standard Oil "alliance" were 
defeated. As consolidated in 1882, the Standard Oil 
Trust absorbed altogether forty companies besides the 
business of a number of individual oil producers. Such 
was the original form of the typical "trust;" but as the 
expression afterwards come to be used, any group of 
persons who combined together with the intention of 
restraining competitive trade or of fixing the prices of 
commodities was regarded as a trust. ^ 

The modern trust is thus the successor of the "en-, 
grosser" of the early part of the nineteenth century; and 
it has acquired a similar unpopularity. The "engrosser" 

^ This definition is abbreviated from the definition given by Mr. S. C. T. Dodd, 
Solicitor of the Standard Oil Company, in an article in the Harvard Law Review 
for November, 1893, on "The Present Legal Status of Trusts." 



REGULATION OF DOMESTIC TRADE 349 

bought up all the grain or other commodity which his 
capital and credit enabled him to buy, fixed his own 
price and endeavored to hold the grain until he obtained 
that price. Sometimes he was successful; sometimes a 
good harvest rendered his scheme impracticable; some- 
times his granaries were broken open by a mob and his 
grain distributed gratuitously; and sometimes he was 
prosecuted by the government. The modern trust may 
be regarded as being exposed to similar experiences. 

317. Standard Oil Trust. — The formation of the 
Standard Oil Trust was accomplished by the appoint- 
ment of a board of trustees, to whom the stock in the 
constituent companies was assigned by the owners; the 
trustees issued trust certificates in exchange, and divi- 
dends were paid to the holders of these certificates. This 
process gave the trustees the control of all the con- 
stituent companies. 

This method was evidently adopted for the purpose of 
avoiding an accusation of acting in "restraint of trade." 
The Standard Oil Company had several imitators, and 
in 1890, one of them, the Sugar Trust, in respect to one 
of its constituent companies, was prosecuted. 

The Supreme Court of the State of New York de- 
clared that the trust was illegal, and in 1892 the Supreme 
Court of Ohio ordered the dissolution of the Standard 
Oil Trust. The Sugar Trust then organized a new com- 
pany, which purchased all the shares of the constituent 
companies ; but the Standard Oil trustees simply divided 
the shares of the constituent companies among them- 
selves and retained the control as formerly. 

In 1899, however, the Standard Oil Company of 
America was formed under a charter of the State of 
New Jersey, and this company absorbed the stock of the 
constituent companies. The wide extension of the busi- 



350 ECONOMICS 

ness of the company, not only in America, but over 
nearly the whole world, the extent to which it influenced 
or controlled railways and steamship lines, and the em- 
barkation of the group of financiers which administered 
its affairs into many other enterprises, attracted uni- 
versal attention to the proceeding. They did not have a 
monopoly of the production of oil, although in 1904 
they controlled about 84 per cent of the domestic and 
90 per cent of the export trade. 

Hostility to the company grew with its own growth. 
It was subjected to a series of prosecutions, and once 
again it was ordered to dissolve. The dissolution of the 
company does not appear to have effected any change in 
the control. The group which effectively controlled the 
company continue to control the elements of which the 
company was comj)Osed. The dissolution seems to have 
affected only its form, not its substance. 

318. Objections to trusts in the United States. — The 
great furore against trusts in the United States is easily 
intelligible. The large company with its power over 
capital, especially through the banks which it controlled, 
ov«er railways, and even over governments, appeared as 
a menace to the small trader. He could not compete 
with it; and it might intentionally or otherwise com- 
pletely crush him. To the small trader such influence 
upon his banker and upon his railway company as the 
trust could exert are impossible, and he naturally regards 
the trust as an unscrupulous competitor. 

In so far as the proceedings of the trusts are dishonor- 
able, they cannot be defended ; v/hen they are illegal it 
is not beyond the power of the law courts to deal with 
them ; but the demand that they should be abolished has 
been shown to be very diflicult to satisfy. The trust 
is apparently an inevitable development of the joint- 



REGULATION OF DOMESTIC TRADE 351 

stock company and is not really fundamentally dissimi- 
lar from a co-operative society. All industrial and 
commercial combinations, small or large, are organized 
for the purpose of making profit : the trust is no excep- 
tion. 

319. Difficulty of dissolving trust. — The notion that 
the State has it in its power to prevent the growth 
or to put an end to the existence of trusts appears to 
underlie the agitation against them. This notion is at 
least doubtful. Apart altogether from constitutional 
difficulties and from the difficulties which arise through 
the legal skill at the command of the trusts, another 
question arises. In what manner could a government 
or a court of law place an arbitrary limit upon the group- 
ing together of persons for the purpose of performing 
an act or conducting a business which might legally be 
performed or conducted by an apparently smaller or 
different group of persons? Even if the State succeeded 
in imposing an arbitrary limit, in what manner would 
this procedure increase the "national dividend" or the 
national welfare? In so far as the question of prefer- 
ences in railway rates or otherwise is concerned, it would 
appear to be practicable to prevent these by the consist- 
ent application of legal measures to those who practice 
them. It is indeed understood that very little discrimi- 
nation of that kind now exists. 

Beyond that, however, it is difficult to go. A change 
of name from several companies to one, or from one to 
several is quite unimportant if the same group of per- 
sons remain in command. Public hostility is, indeed, 
largely directed against specially conspicuous groups 
because they use or are alleged to use the power they 
possess unscrupulously, not because they possess the 



352 ECONOMICS 

power. If, then, unscrupulousness is prevented, a large 
part of the hostihty must disappear. 

320. Stock watering. — Apart from the public objec- 
tion to the operation of the trust, interest has been 
aroused by the methods which have been employed in 
their organization. The aggregate capital invested in 
the physical plant of the constituent companies having 
been ascertained and deduction from or addition to this 
aggregate being made in respect to forced sale or forced 
purchase, the aggregate amount was usually increased 
by the amount estimated as representing the good will 
of the going businesses which were brought into the 
trust. This was sometimes done by means of a pool, 
without any re-issue of capital. But where the constitu- 
ent companies were absorbed in a new company, which 
was formed for the purpose, or where the capital of each 
company was subjected to readjustment in view of the 
altered possibilities of the business, the aggregate of the 
elements above indicated were customarily converted into 
bonds or into bonds and preferred stock. These bonds 
or shares of preferred stock were transferred to the 
shareholders of the constituent companies as payment 
for their enterprises, or the shareholders were paid in 
cash as was arranged. In any event, the bonds and the 
preferred stock represented the whole of the cost to the 
amalgamating syndicate (generally composed of the 
chief among the officers of the constituent companies), 
of the plants and businesses which had been combined. 
The intention of the promoters of the combination was 
to increase the aggregate value of their properties by 
means of the combination. 

Since the bonds and preferred stock bear a fixed rate 
of interest and dividend, it is clear that if a balance of 
profit should remain after the payment of the fixed 



REGULATION OF DOMESTIC TRADE 353 

charges npon the bonds and the preferred stock, there 
would exist no means of pro rata division excepting by 
occasional or periodical bonus as the profit accrued. 
The effect of such a plan would be that if a bonus were 
anticipated or declared, the bonds or preferred stock { the 
holders of which being entitled to participate in the 
bonus) would rise in price. Under normal conditions 
the price would be the amount which the market esti- 
mated on the value of the bonds at the determined rate 
of interest plus the value of the bonus. If the holders 
of the bonds and preferred stock would sell neither the 
securities they held nor their rights to the bonus, there 
would, of course, be no market, nor would there be a 
market if all securities of the kind in question were so 
depressed that no one wanted to buy either the bonds or 
shares or their contingent rights at any price. 

The only practicable alternative to the bonus system is 
the creation of common stock to be held by the possess- 
ors of the bonds and preferred shares for the exclusive 
purpose of providing a means whereby surplus earnings 
over and above fixed charges under the original financial 
arrangement, might be distributed. In one sense, this 
common stock is usually wholly fictitious because it is 
not at the beginning of the new enterprise represented 
either by capital in a physical sense or by good will as 
estimated by the parties to the original bargain. 

Yet sometimes the stock even at the beginning has a 
present value, apart from a prospective value, because 
a part of the price of the bonds is paid for them in con- 
sideration of their being accompanied by a certain num- 
ber of shares of stock. This discounted value is taken 
into account in the price of the bonds. The shares are, 
therefore, not in the position of being valueless, but 
are in the position of having attached to them a dis- 
C— I— 23 



354 ECONOMICS 

counted value in respect to possible future earning 
power. 

If the company is successful, a dividend v^ill eventu- 
ally be paid upon the common stock ; if it is not success- 
ful, no dividends will be paid and the company may even 
default in the payment of the dividends on its preferred 
stock and on the interest upon its bonds. In the former 
case the public will clamor for the stock in the market 
and will compete for the purchase of it, hoping to gain 
a share of the further anticipated profits of the successful 
enterprise; in the latter case, common stock and bonds 
will be alike unsalable. 

It must be allowed that the practice of issuing common 
stock in this manner affords opportunity for fraud, 
through misstatements of the possible profits of the en- 
terprise. The owners of the bonds and preferred stock 
usually retain in their hands a sufficient amount of com- 
mon stock to enable them to retain effective control of 
the property. This makes it possible for them to manip- 
ulate the market in the common stock of their own enter- 
prise with advantage to themselves. 

Such reduced to a simple form is the process of stock 
watering. The effects of the process do not differ from 
those of the inflation of prices of land, with which indeed, 
some of the stock-watering operations are closely con- 
nected. Legislative measures against fraud are some- 
times sufficiently enforced to diminish or prevent it ; but 
no legislative measure can suffice to prevent people 
eager to possess something for which they have not 
toiled, from entering a trap baited with the thing they 
want to acquire. When fraud and ignorance have, how- 
ever, been eliminated from the process known as stock- 
watering, there remains in it an element of deliberately 
accepted and discounted risk which is an inevitable con- 



REGULATION OF DOMESTIC TRADE 355 

comitant of continuous business and which must be pro- 
vided for in some appropriate manner. 

The practice of stock watering as above described, is 
wider than the trust; but in most of the newer trusts it 
appears as an inseparable incident. Except in so far as 
the practice may be accompanied by deliberate fraud and 
except in so far aS it may, owing to its nature, divert 
capital from really productive enterprises to apparently, 
but not really, productive enterprises, it cannot fairly be 
held to be socially disadvantageous, no matter how many 
people ignorant of business may be involved in loss in 
consequence. Such people may be expected to make 
foolish investments in any case. 

321. Conclusion of industrial commission. — The con- 
clusion of the Industrial Commission of the United 
States regarding trusts is that, assuming the cost of 
production of the commodities, which have been sub- 
jected to their influence, to have diminished, the margin 
of profit obtained by the trusts has increased, since prices 
to the consumer have either remained the same or have 
advanced. Such a conclusion would be equally difficult 
to defend and to refute. The assumption upon which it 
is based is, however, probably in many cases question- 
able. The law of diminishing returns in mineral ex- 
ploitation, for example, seems to lead rather to an in- 
crease in the cost of production than to a diminution. 
Even if it were sound, in an economic sense, to attribute 
to the trust all the evils Avhich popular imagination has 
suggested, the trust may be regarded as a morbid 
growth, like a goitre, equally dangerous to sustain and 
to cut off. 

322. National oumership of land. — The State may 
obtain the land of a country by discovery, by conquest 
or by purchase. It may either retain it and manage it 



356 ECONOMICS 

by State officials, or it may sell, lease or give it away 
in free grants. If the State retained and administered 
the land, it would be necessary, if it were to be utilized, 
to do so by means either of forced or of free hired labor. 
There are important historical instances of large areas 
of land being held and administered by the State both 
by forced labor (as in Russia, especially in the times of 
Peter the Great and Katherine II) and by free hired 
labor (as in Russia at the present time). 

Given adequately skilful administration, there is, in 
the nature of things, no reason why the produce of a 
State domain should not be as large as that of a private 
domain of the same dimensions under similar manage- 
ment. Experience has shown, however, in every histor- 
ical case, that considerations other than economic have 
compromised the economical success of State administra- 
tion of land. The administration has been either too 
lax or too rigid. When it was too lax the State suf- 
fered, and when it was too rigid the people suffered, and 
often rebelled. In both cases the State lost materially 
and in prestige. 

323. Distribution of land a general policy. — The 
practical difficulties which arose from the intimacy be- 
tween the State administration and the economical rela- 
tions of the people were so great that, in all highly devel- 
oped modern nations, the policy of alienating the public 
lands has developed. This policy appeared to be neces- 
sary in newly discovered or newly conquered countries in 
M hich the population was scanty and to which it was 
impossible to induce immigration on other terms than 
by liberal grants or sales of land. Such grants or sales 
were made to individuals on conditions of settlement 
or to companies on condition of obtaining settlers. 
Direct revenue from the land, even if such a revenue 



REGULATION OF DOMESTIC TRADE 357 

could be recovered by the State, was less important for 
the State than the establishment of people upon the land. 

When it became necessary for the State, as it did both 
in Canada and in the United States, to facilitate the con- 
struction of railways, the only fund from which the State 
could draw without crippling the development of the 
country by the imposition of excessive taxation, was the 
fund in land. Large grants of State lands were thus 
alienated to the railway companies to enable them to 
borrow ready money for construction purposes. 

In those cases in which the grants were corruptly or 
extravagantly made, it is reasonable to believe that the 
administration of the public lands, had it remained in 
the hands of the State, would have been equally corrupt 
and extravagant. But alienation appears to have been, 
in both countries, the only possible policy unless the occu- 
pation of the country by an adequate population was to 
be indefinitely postponed. It is obvious that in the 
struggle for land by different races, large areas cannot 
be held, except by the settlement of a population suffi- 
cient to resist invasion if necessary. Practically the 
whole of the public lands of both countries is either alien- 
ated or is in course of alienation, at all events in so far 
as any desire for possession has made itself evident. 

The public lands having been alienated, resumption 
by the State can only be effected by confiscation or by 
purchase. The first method may be dismissed as being 
impracticable, apart from any question of justice to 
those who have been induced to become citizens of the 
respective countries by promises of free land ; the second 
method appears to be equally impracticable because it 
would involve the practical endowment with State pen- 
sions of the bulk of the community and the release of 
great numbers from the labor of production. The 



358 ECONOMICS 

economic disturbance which such an operation would in- 
volve would be incalculable. 

The same considerations apply to the acquisition by 
the State of the means of production other than land. 
The complicated mechanism of modern industry could 
not be acquired by any State without formidable inter- 
national difficulties. Such difficulties would be great in 
proportion to the magnitude of the interests involved. 
The result of the operation, if it were carried out, might 
not be an increase, but rather a diminution of the 
"national dividend," unless it is supposed that produc- 
tion for the State went on as actively as it now does for 
individual advantage. 

324. Nationalization of industry. — That it would be 
possible for a modern State to undertake gradually 
the administration of all industries and of all sys- 
tems of transportation and the like- — in other words, 
to possess itself of the means of production — may be 
granted. But when this is accomplished would the 
"national dividend" — that is, the aggregate of product — 
be less or more than it is now? If the characteristic of 
production under the capitalist system is a feverish haste 
in exploitation and manufacture, and if on social grounds 
this is a matter of objection, is it to be concluded that 
production under a system of State collectivism would be 
less in the absence of this feverish haste than it is now? 

Even if the system of distribution under State man- 
agement were ideal, there seems grave reason to believe 
that there would be less to distribute. It may be that 
the world is too well off and that it consumes too much ; 
but it would be hazardous to diminish production on that 
hypothesis. 

The fundamental social question is not, after all, one 
of distribution, but is one of production. The methods 



REGULATION OF DOMESTIC TRADE 359 

of distribution are no doubt defective, but to diminish 
production is not necessarily a means of mending them. 

It is suggested that this test of production may be ap- 
phed to any project having for its object the national- 
ization of any industry. The experience of govern- 
ment management in all countries and among all races 
seems to show that it is, at least, doubtful if under na- 
tionalization of industry, so large a "national dividend" 
would be available as under the existing system. It is 
possible that the "national dividend" might be dimin- 
ished even though the system of compulsory service in 
the army, which obtains in Continental Europe, were 
applied to industry, for experience has not shown con- 
clusively that forced labor is as productive as voluntary 
labor. 

The socialist Premier of France, M. Briand, did not 
act illogically, from the socialistic point of view, in call- 
ing out striking railway men as reservists and requiring 
them to return as soldiers to the work which they had left 
as railway servants. The close connection between com- 
pulsory service in one branch of the activities of the State 
and the probability of compulsory service in another 
could not have been more fully demonstrated. 

325. Trusts are a step towards national ownership, — 
Such a test as is suggested above would not, however, by 
any means exhaust the subject. Neither increase of pro- 
duction nor improvement in the system of distribution 
are the sole ends of social life. Desire for political power 
to the extent of complete control of the executive gov- 
ernment by the working class, in so far as such desire 
exists, is not likely to be diverted by fear of what must 
appear to it as the remote contingency of a possible 
diminution of the product of labor. For those who en- 
tertain the idea that the evolution of society is making 



360 ECONOMICS 

for the nationalization of the means of production, the 
trusts have no terrors. The greater the combination, 
the more effective the monopoly, the more definite the 
control over prices which the trust exercises ; in short, the 
more nearly the power of the trust approximates to the 
power of the State, the more is proved, from this point 
of view, at once the necessity of owning, rather than of 
controlling the trusts by the State and the practicability 
of the management by the State of large enterprises. 
This view is, however, based on very large assumptions. 

Ai^art from the question of the possible diminution 
of product under a system of complete nationalization 
of the means of production, there are also the questions 
of the international character assumed by modern com- 
merce, and of the international character of modern 
capital. 

The question of the position of those industries which 
the State might absorb is an important one. At present, 
holders of industrial securities are subject to the fluctu- 
ations of the market for such securities. When profits 
are high and trade is brisk, dividends are high. When 
trade is dull, dividends may disappear. If the State as- 
sumed the industries and undertook to pay interest upon 
the capital invested, on any conceivable basis of valu- 
atioil, the State credit would be involved in the payment 
of a fixed rate of interest. At the present moment, there 
is a large class of security holders in all countries. Un- 
der the nationalization of industry this class would be 
enormously increased. Its interest would be by no 
means identical with those of the workers in the State 
workshops. A new and serious class struggle might 
easily develop between the security holders and the work- 
ers, even if a large number of the latter were to be found 
among the former. The security holders would require 



REGULATION OF DOMESTIC TRADE 361 

to secure and to exercise considerable political power 
in order to prevent the possibility of repudiation. Any 
proposal to absorb industrial enterprises by merely con- 
fiscating them would not only divide society into two 
hostile camps, but would involve, in effect, the exter- 
mination of one of them. In any case it would appear 
that the socialist State would encounter problems not 
less serious than those which are now encountered under 
the capitalist system. 



CHAPPTEH III 

TAXATION 

326. The revenue. — The peculiarity which distin- 
guishes the revenue of the State from private revenue 
is that while the amount of private expenditure depends 
upon the amount of income, the amount of the State 
revenue is determined by the amount of expenditure. 
Given certain expenses, the finance minister of the State 
is obliged to find the revenue to meet them either by 
collecting it from the people or by borrowing it. 

Collection of revenue may be effected in two ways — 
by taxation or by receiving payment for direct services 
rendered to certain persons by State officials. The rev- 
enue from taxation is derived from the people. Under 
whatever form it may appear, it is a deduction from the 
incomes of those who contribute to it, or it may be re- 
garded as a deduction from the available aggregate 
national income. 

327. Taxes on income. — Taxes may be imposed di- 
rectly upon those upon whom it is intended their burden 
should fall, or they may be imposed upon persons by 
whom they may be transferred to others. An income 
tax is an example of a direct tax and an import duty is 
an example of an indirect tax. The policy of a country 
as to the method of taxation must depend largely upon 
the customs methods to which the people have become 
accustomed. A tax which causes irritation is 'prima 
facie not a good tax. 

362 



TAXATION 363 

For example, the people of Great Britain have become 
accustomed to an income tax, while in the United States 
the new income tax is unpopular because the people are 
not habituated to it. Income tax is levied in Canadian 
cities without formidable objection, but in Berlin an 
attempt to impose an income tax led to widespread re- 
fusal to pay it. A municipal income tax in Great Bri- 
tain would be likely to meet with similar opposition. 
While heavy import duties upon manufactured goods 
and upon agricultural produce are in force in the United 
States and in Canada, such duties are not levied in Great 
Britain, and two recent movements, one in 1884 and the 
other since 1900, having for their object the levying of 
such duties, have met with hostility. 

328. Iinports and exports. — The interest of a creditor 
country, that is to say, a country whose people have a 
large part of their capital invested abroad, must lie 
rather in the facilitation of imports than in impeding 
them, because the interest of its foreign investments and 
the repayment of capital invested abroad are insured by 
these imjDorts. 

On the other hand, the interest of a debtor country, 
that is, a country which has borrowed heavily, may lie in 
discouraging importation, and in encouraging exporta- 
tion, the latter being the means by which it meets its 
foreign obligations. When a country is borrowing, 
however, it must import, although it may not do so from 
the country from which it borrows. Canada, for in- 
stance, has been borrowing heavily from Great Britain, 
but has not been importing heavily from that country. 
The loans effected in Great Britain have entered Canada 
as imports from the United States. The transference 
has been conducted by means of the extensive credits 
estabhshed in favor of Great Britain, in the United 



364 ECONOMICS 

States through the interest upon investments there, and 
through the repurchase by that country of some of the 
securities formerly held in Great Britain. In the main. 
Great Britain has been selling United States securities 
and buying Canadian. This process accounts to some 
extent for the falling off in price of United States securi- 
ties, because the domestic demand for them has not been 
sufficient to digest them at the price at which they stood 
when the British and European demand was greater 
than it is now. 

The credit of a country depends very largely, although 
not exclusively, upon the character of its imports during 
a period of borrowing. If its imports during that 
period consist, in the main, of articles of luxurious con- 
sumption, its credit must diminish because it will be evi- 
dent that the money which it has borrowed has not been 
productively employed. If, on the other hand, its im- 
ports consist in the main of iron for railway and other 
construction and of machinery, it is evident that the 
money it lias borrowed has in the main been expended 
productively. It must be realized, however, that it is 
possible to strain credit by borrowing even for these 
purposes, because the expenditure in highly durable 
forms of capital may be greater than the general eco- 
nomic conditions justify. 

329. International trade depends upon comparative 
prices. — Since the quantity of goods which a country 
exports must depend upon the comparative prices of the 
goods in that country and the countries to which it ex- 
ports, it is evident that a country in which all manufac- 
tures are protected by a high tariff is not in a favorable 
position to export manufactured goods unless these are 
sold abroad at a lower price than they are sold at home. 
This condition, which is known as "dumping," occa- 



TAXATION 365 

sionally occurs. When it does occur, however, it is im- 
mediately followed by a reaction against protection, on 
the ground that the foreigner is placed in a more favora- 
ble j)osition as purchaser than the native customer. 

In general, a country which protects its native manu- 
facturers heavily, and which therefore holds these at 
higher prices than countries in which they are not so 
heavily protected, if it exports at all, must export raw 
materials or the products of exploitative industry. Thus 
Canada exports wheat and lumber and the United 
States wheat and cotton. 

A proliibitory tariff, if it be successful in excluding 
goods, cannot contribute revenue to the State. Even 
a protective tariff is not necessarily productive of rev- 
enue. For revenue purposes, a relatively low tariff 
must be adopted or other means of taxation must be 
found. 

330. Classification of revenue. — Revenue may be de- 
rived from the sale of natural resources (as in the case 
of timber, lands or minerals) ; it may be derived from 
leases (as in the case of lands) ; it may be derived from 
license fees or special taxes imposed upon certain busi- 
nesses. It may be derived from a series of special taxes 
upon business, based upon income or upon capital, or 
otherwise ; or it may be derived from a general tax upon 
property, or by a general tax upon income, in both cases 
with certain inferior limits, or by means of a graduated 
scale. Or, revenue may be derived by means of a tax 
upon land, urban or rural, or both. All of these methods 
have been adopted in the United States and in Canada. 

In Upper Canada, before Confederation, licenses to 
carry on certain businesses formed a large part of the 
revenue. Later, licenses to cut timber and to engage 
in mining in certain places brought in a considerable 



366 ECONOMICS 

income. Import duties were levied at Quebec as well 
as at the upper Canadian ports, and were afterwards 
divided in certain proportions between the upper and 
lower Provinces. When the "casual and territorial 
revenues of the Crown" were transferred to the provin- 
cial governments, a small amount was reahzed from sales 
of land and from an insignificant land tax which was 
generally in arrears. 

After Confederation the import duties were with- 
drawn from provincial control, and the revenue collected 
by the provinces was supplemented by a Dominion sub- 
sidy. The revenue, as thus constituted, did not suffice 
for the provincial expenditures, and further sources of 
revenue had to be found. A beginning was made in 
Ontario by the imposition of Succession or Death duties 
and later by the taxation of corporations. 

In the United States the revenue from certain licenses 
and the import duties are reserved for the Federal Gov- 
ernment, while states have separately engaged in experi- 
ments in other means of raising a revenue. 

Notwithstanding ardent advocacy for many years, 
land taxes form nowhere the bulk of the revenue of mod- 
ern nations. In new countries, where the population is 
scanty and the primary need of the country is immigra- 
tion, a heavy land tax or an illiberal policy respecting 
land would act as a deterrent of immigration. In older 
settled countries, a heavy land tax is more feasible, but 
its imposition tends to throw many burdens upon the 
shoulders of the landowner because the prestige of land- 
owning has been diminished and the price of land 
reduced. The ownership of land has been wholly com- 
mercialized. Through the influence of taxation and 
otherwise, the landowner refuses to bear the social bur- 
dens to which he formerly submitted as an incident of 



TAXATION 367 

his position. For example, the maintenance of local 
charities, formerly borne by the landowners, is now in- 
evitably thrown upon the States. The gain, if any, 
from taxation, is thus at least partially offset by an 
increase in the public burdens. The social advantage 
which may be held to accrue from the elimination of the 
non-economic element in landholding is not necessarily 
accompanied by a net economic gain. 

331. Graduated income tax. — In must be allowed that 
the popular conception of taxation has been changing 
with the changes in the doctrine of the functions of the 
State. Since the State has come to be regarded not 
merely as a regulative agent, but also as collector and 
distributor of wealth, the idea of discriminating between 
those forms of income which are presumed to be earned 
by labor of some kind and those forms of income which 
appear to be due to adventitious gains or unearned in- 
come, as it is called, has crept into the taxation policy 
of many countries. 

A rough and ready method of effecting this discrimi- 
nation is the graduated income tax. In this system, it 
is assumed that up to a certain point the receiver of an 
income may earn it, and that above that point his income 
is received, but not earned. Similarly it is proposed to 
appropriate for the purposes of the State by means of a 
special tax upon sales of land, at least a part of that 
portion of the increased value of land, where such in- 
crease occurs, which is presumed to be due to adventi- 
tious causes, for example, to the general increase in the 
numbers or in the wealth of the population. 

It should be observed, that while a graduated income 
tax may react by driving persons who enjoy large in- 
comes out of a country where these incomes are, in their 
opinion, exorbitantly taxed, a heavy tax on land might 



368 ECONOMICS 

react in diminishing the nobility of property in land by 
rendering such property insecure, and might, therefore, 
result in the diminution of the value of land in such a 
way as to diminish, instead of increasing, the revenue 
yielded by a land tax. 

332. Two theories of taxation. — It is clear that in all 
such experiments in taxation, those who are responsible 
for the policy of the State must consider not merely 
what the State may presume it has a "right" to take 
from the people, but what economic reactions may take 
place owing to the exercise of that "right." 

There are, broadly, two theories of taxation. By one 
theory it is explained that the taxation which is imposed 
by a well-ordered modern State, is simply a payment by 
the citizens for services rendered by the State to them 
— services of organization, defence, etc. — and that, there- 
fore, the increased taxation is not a net increase, but 
merely an additional payment for more numerous or 
more valuable services. In fact, from this point of view, 
there is really no tax burden because the State returns 
at least as much value as the tax represents — that is, at 
least as much value in the consumers' sense, since the 
State is presumed to render the services at their cost 
taken as a whole. 

The other theory explains that all taxation is a burden 
upon the people, that it means a deduction from their 
disposable incomes, and that, although the services which 
are rendered by the State must be rendered, their 
cost is so much greater than the cost when rendered by 
private persons that the more services the State under- 
takes the greater the disadvantage of the people. This 
is so because they have to pay more in taxes than they 
would have to pay for the services. According to this 
theory, it is not expedient for the State to take out of the 



TAXATION 369 

pockets of the people any more than is absolutely neces- 
sary. This canon would reduce the services of the State 
to a minimum, unless it could be shown that these serv- 
ices were being rendered by the State as economically 
(in the wide sense) as they could be rendered by private 
citizens. 

The doctrine that taxation is no burden because the 
services rendered by the State compensate or more than 
compensate for it, appears to induce the belief, which is 
more or less prevalent, that the State is an external 
beneficent agent, which gratuitously bestows benefits. 
This view appears to lead to extravagance in public ad- 
ministration, to the embarkation of the State in futile 
enterprises and to the employment of unnecessary or 
incompetent functionaries. The other theory is asso- 
ciated with two famous doctrines — the doctrine of the 
absolute sovereignty of the State and the doctrine that 
surplus value (consisting of rent, interest and profit) 
results from the exercise of the functions of the State 
and is, therefore, wholly due to the State. The former 
doctrine in its bald form has long been explicitly re- 
jected, but its implications remain in such forms as the 
theory of taxation in question. The latter doctrine is 
quite at variance with the idea that any share of the 
product is due to any of the contributories to produc- 
tion, for if surplus value is due to the exercise of the 
State function as a condition precedent to the realization 
of any surplus, private or public, this is equally true of 
the value of labor. It is true of all value and not 
merely of surplus value. To admit the "right" of the 
State to absorb all value is to admit the absolute sover- 
eignty of the State. 

Projects devised for the purpose of acquiring surplus 
yalue piecemeal have long had a certain following, and 

C— I— 24 



370 ECONOMICS 

some of them have been incorporated into the tax laws 
of various countries. In so far as such projects are car- 
ried out, the effect of them is a diminution of individual 
liberty. 

333. Who pays taxes? — While certain taxes cannot 
fail to be borne by those upon whom they are directly 
levied by the state, the class of taxes customarily known 
as indirect may be transferred from the shoulders of 
the person upon whom they are, in the first instance, im- 
posed, to the shoulders of other persons. For example, 
an excise duty upon tobacco or spirits is levied upon 
the manufacturers, and a customs duty upon the same 
commodities upon the importers; but usually, the duty 
in both cases is transferred to those who purchased the 
commodities for consumption. The case of other im- 
ported goods is less obvious. 

The question is, can the incidence of taxation be de- 
termined with any approach to precision? The prin- 
ciple upon which it may be determined has already been 
described in connection with the effect upon prices of 
the imposition of a tariff. It is indeed through prices 
that the reactions of taxes occur. By means of trans- 
actions in which the goods which are the objects of tax- 
ation pass from one hand to another, the taxes are trans- 
ferred from one shoulder to another. 

If reference is made to the previous statement it will 
be gathered that in respect to taxes, in general, as in 
respect to import duties in particular, the state of the 
economic atmosphere will determine the classes of per- 
sons upon whom they will fall. If the atmosphere were 
highly competitive as regards production of the com- 
modity upon which the tax is imposed, then the tax 
would tend to fall upon the consumer; if it were com- 
pletely monopolistic as regards' production, the tax 



TAXATION 371 

would tend to fall upon the producer. In all interme- 
diate positions the tax would be divided. 

834. Marginal producer. — There are, however, certain 
implications of the general theory which apply to cer- 
tain taxes. If we assume that the competition of laborer 
with laborer for employment is so keen that all laborers 
are living at the lowest possible wage upon which it is 
possible for them to subsist, it is clear that to impose a 
tax upon wages would be absurd — ^under such conditions 
laborers could pay no taxes. If we assume that em- 
ployers are all working upon marginal profits, that is, 
for subsistence wages of superintendence, it is clear, also, 
that a tax upon the gross income of such employers 
could not be realized. If an attempt to collect it were 
made, all such employers must be driven out of business. 

Similar conditions might be assumed in respect to 
land and to capital. If the land yielded no rent, a tax 
upon it could not be realized unless the landowner had 
other sources of income. If the capital yielded no in- 
terest, a tax upon it would diminish the amount of it, 
and if the tax were continued, that amount would 
eventually be exhausted. If all the various economic 
groups were on the margin, that is to say, at the very 
minimum of subsistence, the collection of taxes would 
be impossible. If any one member of the group is at 
the minimum, the collection of a tax upon that member 
would be impossible. 

335. Economic strength of groups. — Again, if the 
economic conditions of the time (a time, for instance, 
like that immediately succeeding an epidemic) enabled 
the laborers to demand the whole of the net product, 
enabled them, in short, to absorb all but the bare sub- 
sistence of the employer, capitalist and landownerj, the 



372 ECONOMICS 

whole burden of taxation must fall upon the laborers. 
The same is true of the other groups. 

If, for example, the landowner absorbed in rent all the 
net product — all the value of the product of productive 
operations in excess of the bare subsistence of laborers, 
employers and capitalists — the burden of taxation must 
fall upon his ample shoulders. If the capitalist absorbs 
through usurious rates of interest all the excess income 
of the community above bare subsistence, he in turn will 
have to contribute all that is collected for the main- 
tenance of the State. This is, however, only another 
way of saying that everybody must pay taxes either 
directly or indirectly through reduction of his income in 
some form or another. The essential point to remem- 
ber is that taxes are borne by persons and not by things. 
A tax upon a commodity is a tax upon the consumer 
of the commodity or upon the producer — a tax upon 
land is a tax upon the person who uses it. 

It is true that a tax upon land might be paid by a 
person who possessed land but did not use it. In that 
case he would require to pay the amount of the tax out 
of resources other than those yielded by the land in 
question. Thus, the tax, although levied in respect of 
his land, would really be paid from income, derived 
otherwise than from land and would therefore be a tax 
upon that income. If he borrowed the money to pay 
the tax upon land, he could do so only up to the limit 
of the security which the land represented. This secur- 
ity would be determined by the use to which the land 
might be put and the amount of the tax which had been 
paid would form a deduction from the price receivable 
for it, if it were eventually sold, or from the rent ob- 
tained or realized by the use of it. 

In any case a tax upon land must be paid by a person 



TAXATION 373 

or group of persons. It does not appear as a mysteri- 
ous product from the land or from anything else. In 
other words, a tax is always a deduction from income 
and the taxes of a nation are therefore a deduction from 
the aggregate national income. 

In the reactions which are involved in the determina- 
tion of prices, some taxes are transferred from the seller 
to the buyer or they are divided between them accord- 
ing to the economic strength or weakness of the buyer 
and seller, respectively. The least economic strength is 
to be found in those buyers or sellers who are just above 
the margin. They are able to pay without passing out 
of existence, and they are too feeble in an economic 
sense to resist. The greatest economic strength is to be 
found in the indifferent buyer or seller. He will be 
able at once to buy or sell at his own price and this price 
will in general contain as little of the tax as may be. 



CHAPTER IV 

THE BUDGET AND PUBLIC DEBTS 

336. Public eocpenditures. — The expenditure of the 
State is customarily classified in the same manner as 
that of any individual may be classified — according as 
the expenditure is on account of necessaries, conveni- 
ences or luxuries. Clearly, the things necessary to a 
State are those which concern its existence as a State. 
The form of the State will determine what these things 
are. If it is an independent individual State or a federa- 
tion of states, it will be necessary to secure itself against 
foreign aggression or even foreign insult by means of 
a sufficient military force, and it will be necessary to 
secure itself against internal disorder by means of a 
sufficient police force. It will also be necessary to pro- 
vide for the administration of the government by the 
appointment of judges to administer the law and by 
provision for the legislators appointed or elected to 
make the law. 

According to the modern idea of the State these are 
the primary necessities. Among the conveniences may 
be reckoned the maintenance of a diplomatic service for 
the purpose of transacting business with foreign nations, 
and for the assistance of its own "nationals" who travel 
aboard. Among the luxuries may be considered the 
maintenance of more or less dignified and luxurious 
establishments for the conduct of the government and the 

374 



THE BUDGET AND PUBLIC DEBTS 375 

rewarding of persons who have rendered service to the 
State. 

In modern times, the largest individual item in the 
catalogue of expenditures in nearly all the great nations 
is the expenditure for military purposes. But many 
nations have undertaken large expenditures on other 
grounds. Germany and Great Britain, for example, 
expend very large sums upon education and the latter 
has undertaken huge expenditure in the reorganization 
of the system of land tenure in Ireland. Germany, 
Russia, Italy and Canada have devoted immense sums 
to the construction of canals and of railways; and the 
United States has undertaken the completion of the 
Panama Canal. 

The expenditures of all modern nations for civil pur- 
poses have increased with the demands upon the State 
for services in various directions. The State is regarded 
as the universal servant of the public, and when private 
enterprise is lacking the State is called upon to render 
the service. In democratic countries it is difficult for 
govermnents to resist the pressure to extend the func- 
tions of the State. The cost to the community as a 
whole is frequently disregarded, and it is often assumed 
and sometimes eloquently announced in Parliaments 
that great enterprises may be undertaken by the State 
without cost to any one. It is obvious that this is an 
illusion. 

A check upon and audit of expenditures is imposed 
in Great Britain by the Treasuiy, and in Canada by the 
auditor-general and the Treasury Board. It is the 
business of the auditor-general to see that only legally 
authorized expenditures are made and that the various 
departments keep within the votes made on their ac- 
count by Parliament. 



376 ECONOMICS 

337. Annual budget. - — The budget or annual state- 
ment of revenue and expenditure by the finance minis- 
ter is a very usual, but not a universal, feature of public 
financial methods. In France and Great Sritain an 
approximately similar method is employed and the 
method adopted by Canada is the same as the method of 
Great Britain. 

Immediately upon the close of the financial year it is 
the custom for the Chancellor of the Exchequer in Eng- 
land and for the Finance Minister in Canada to make a 
statement regarding the revenue and expenditure of 
the year which has just closed and to announce his 
estimates of the revenue and expenditure of the year 
which has just commenced. The statement and the es- 
timates are, of course, prepared by the permanent 
officials of the Treasury acting in consultation with the 
officials of the revenue and of the spending depart- 
ments. 

The estimates of revenue for the coming year are in 
the first instance based upon the yield of the past year, 
the amount being added to or subtracted from, accord- 
ing as the view is taken that the ensuing year will be 
more or less productive than the previous year. When 
the Minister of Finance announces the changes which 
he proposes to make in the revenue, he may reduce or 
increase one or more taxes, and then the necessary modi- 
fications upon the gross revenue which these changes 
involve will be stated by him. 

In case the Finance Minister announces the reduction 
or the increase of taxes, the reduction or the increase 
takes effect from the moment of his uttering in Parlia- 
ment the words concerning them. This practice does 
not, of course, prevent speculation in respect to the like- 
lihood of a particular increase or reduction being made, 



THE BUDGET AND PUBLIC DEBTS 377 

but it places everyone upon an equal footing in respect 
to changes in duties. 

As regards expenditure in the British and Canadian 
system all national expenditures must be initiated by the 
government. The constitutional theory is that the 
sovereign, otherwise the government, asks for supply of 
money and that Parliament either does or does not 
grant the supply. For a private member to ask Parlia- 
ment to grant supply would therefore be anomalous. 

The budget statement is customarily concluded by 
the moving of resolutions by the Finance Minister. 
Those resolutions declare that the proposals of the budg- 
et be given effect. Subsequently, a Customs Act is in- 
troduced which contains the necessary legal statement 
of the change in the law, and other revenue acts follow, 
should these be necessary. 

The expenditure side of the budget is similarly dealt 
with in a series of Appropriation Acts. These acts go 
into detail in respect to the expenditure of the different 
departments. Constitutional practice has determined 
that an administration which has been defeated in the 
House of Commons, through the budget resolutions 
being negatived, does not necessarily resign. 

After the acts which contain the budget proposals 
have passed the House of Commons in Great Britain 
or in Canada, they go, one to the House of Lords and 
the second to the Dominion Senate. Constitutional 
practice prevents either of these bodies from altering a 
1 money bill. They may throw it out, but they cannot 
1 amend it. 

In the French system the accounts of the revenue 
and expenditure for a financial year are made to include 
the items properly referrable to the finances of that year 
only. Since sums of money are frequently incurred in 



378 ECONOMICS 

one year and paid in another, this system, although con- 
ducing to accuracy, also conduces to delay in closing 
the accounts. Not for two or three years after the close 
of a particular year can the accounts properly belong- 
ing to it be finally closed. 

The English system, on the other hand, provides for 
all payments on government account being made by the 
Treasury through the Bank of England. Only those 
amounts actually paid or received within the year are 
taken into account in the finances of the year. Thus, 
at the close of business on the 31st of March in each 
year, the exact state of the public accounts is known 
and is generally published on the following morning. 

338. Public debts. — National debts are a product of 
modern financial conditions. Their rise is coincident 
with the beginning of modern discovery and the 
struggle for colonial empires which ensued upon the 
discovery of America and of the Cape route to the East 
Indies. Prior to that epoch, governments borrowed 
money from individuals or groups of individuals of 
their own or of other nations. But the loans were cus- 
tomarily made on the personal credit of the sovereign 
since, in general, there was no distinction between the 
finances of the public administration and the finances 
of the sovereign's household. 

As constitutional government developed in the coun- 
tries of Western Europe, the finances of the nation were 
sharply separated from the finances of the sovereign, 
and loans upon the general credit of the State became 
possible. The general credit of the State depended 
upon the stability of the government, upon its taxing 
powers, and upon the powers of the people to sustain 
the burden of any taxes which might be imposed. 

The ]3ower to lend the State the large sums of money 



THE BUDGET AND PUB.LIC DEBTS 379 

which it wanted, when it wanted any at all, could only 
arise when the accumulation of capital had rendered 
possible its concentration on ]3articular occasions. This 
condition began to arise toward the end of the seven- 
teenth century, with the increased activity of foreign 
trade, especially with the countries which during the two 
preceding centuries had come to be exploited by Euro- 
pean traders. 

The protection and encouragement of trade by means 
of an aggressive colonial policy could be effected only 
at considerable cost and the cost was in general so great 
that to seek to recover it by means of general taxation of 
the people would have been to incite the people to re- 
bellion. The cost might probably have been recovered 
by large direct taxes upon the profits of external trade, 
but to impose these was to impede the growth of that 
trade by deterring capital from entering into it. The 
expedient of borrowing from the same class of persons 
M^hose activities rendered the expenditure necessary 
was therefore obvious. 

339. Early government loans. — The train of events 
led in England to the first government loan from the 
Bank of England, the governors and directors of which 
were all merchants, and to similar loans from the Bank 
of France. These loans were made in the form of ad- 
vances upon salable and transferrable documents of 
obligation on the part of the respective governments to 
pay a certain annual rate of interest forever, or alterna- 
tively to repay the principal sum with interest, the option 
lying with the government which incurred the obligation. 

We have here the germ of public debts in any con- 
siderable sense, and as well the germs of the money 
market and of the stock market alike. For, when the 
government stocks were taken up by the banks, it was 



380 ECONOMICS 

done in general for the purpose either of selhng them 
themselves or trading or borrowing upon the security 
which they represented. 

340. Government securities. — In other words, the 
negotiation of a government loan by a banker or group 
of bankers did not diminish their credit, unless the credit 
of the government was doubtful or unless the bankers 
had made a doubtful bargain. They could count upon 
being always able to dispose of a portion or of the 
w^hole of the government debt should they require to 
do so. A market was thus created for government se- 
curities because every one knew that he could sell these 
securities whenever he wanted to do so, although the 
price which he could obtain for them might be expected 
to vary with the abundance of such securities in the mar- 
ket. Should he desire to hold the government stock he 
would receive a rate of interest which did not vary. 

Government stock thus became an important factor in 
the money market, because of its ready salability. It 
might be held with advantage temporarily, because in- 
terest was always accruing upon it and the stock might 
under all normal conditions of the market be immedi- 
ately converted into cash. The amount of it which the 
banks held might thus be regarded as quite equivalent, 
under ordinary conditions, to actual coin and nearly 
equivalent to coin under any conceivable conditions. 
The high liquidity of government stock thus rendered a 
money market in the large sense possible, and even in 
a smaller sense, greatly facilitated monetary dealings. 

The frequent purchase and sale of government stock 
thus led to similarly frequent transactions in the stocks 
of companies issued in a manner similar to that adopted 
by the government, and thus led to the development of 
the stock market which, although it must be regarded 



THE BUDGET AND PUBLIC DEBTS 381 

as separate from the money market, is, nevertheless, 
strongly influenced by it. jModern governments adopt 
various methods of issuing loans. The principal 
methods will now be described. 

341. Funded loans. — Funded or permanent loans 
are usually issued in large amounts. They bear a 
specific rate of interest, and are divided into specific 
sums; but they are issued at variable figures according 
to the state of the market. Indeed, the same loan may 
be purchased at many different figures. Sometimes, 
tenders are called for by the government, the tenderer 
offering to take so much of the stock at a certain price. 
A loan issued by a government of high standing, or 
issued under exceptional conditions, may be tendered, 
in the aggregate, for several times the amount of the 
issue. 

This was the case in the Japanese loans of 1905. The 
reception of the loan by the English market was due 
largely to the pro- Japanese enthusiasm which existed 
at that time, and partly to the hostility with which the 
anti-Semitic riots in Russia had inspired the Jewish 
financial circles of western Europe. 

When such conditions are anticipated, tenderers in 
general apply for more stock than they expect will be 
allotted to them. The conditions of the money market 
may be such that the previous issues of stock by the 
government are salable only at a point far below par, 
and that further issues would also be salable only 
under a more or less heavy discount. This does not 
necessarily imply a deficiency in credit of the issuing 
government, although it may do so. 

For instance, Russian Government stock fell slightly 
after each important defeat of the Russian armies in 
Manchuria and fell heavily during the revolutionary 



382 ECONOMICS 

movement in 1905. The reasons for the deehne of the 
stock were, in the first case, the likehhood of the pro- 
longation of the war or the cessation of it, involving the 
payment of a large indemnity to Japan with consequent 
increase in the amount of government debt; and in 
the second case to the diminished stability of the gov- 
ernment on account of the serious character of interior 
disorder. 

On the other hand, British consols or consolidated 
stocks have fallen, not because of the diminished credit 
of Great Britain, but because of the conditions of the 
money market, which have caused an advance in the rate 
of interest. 

342. Market declines of government securities. — A 
discount upon government stock or a decline of it in the 
market may be caused, and in the case of the issues of 
the great powers usually is caused, by the scarcity of 
funds seeking investment and by the higher rate of in- 
terest which is in consequence demanded by the posses- 
sors of those funds. Since the government rate of 
interest is fixed, the only method of expressing the 
advance of the market rate of interest is by means of a 
discount upon the principal of the issue. 

But government loans may be depreciated for an- 
other reason. The demand for such issues, although 
not invariable, is, nevertheless, limited because at any 
particular moment the amount of capital in the market 
for investments is limited. 

343. Effect of other securities. — We have seen (p. 
270) that the money market is divided into compart- 
ments, which, though not absolutely self-contained, are, 
nevertheless, relatively so, partly from causes which 
arise in the minds of owners of capital and partly from 
legislative causes. Under the law in many countries. 



THE BUDGET AND PUBLIC DEBTS 383 

respecting the character of investments which may be 
made by trustees of pubUc or private funds, the estates 
of deceased persons and the Uke, without personal lia- 
bihty on the part of such trustees, it is usually provided 
that investments should be made in government secur- 
ities or in securities of a similarly high character. For 
this reason, a large part of the funds available for in- 
vestments in such securities cannot be invested in any 
other. This circumstance increases the amount which 
may be invested in first-class securities and diminishes 
the amount available in the money market for general 
investment. The rate of interest in the general market 
will be increased if, for any reason, funds are diverted 
from general to special use. The advance of the gen- 
eral rate will prevent the flow into the investment mar- 
ket for government stock, of capital which might other- 
wise find its way there. The consequence is that the 
rate of interest in that investment market will advance, 
and if further government stocks are thrown upon it 
for realization, the price of these stocks must go down. 

Thus the mere increase in the amount of government 
or of trustee investment stocks, no matter by whom or 
for what they are issued, brings about a rise in the rate 
of interest and a fall in the capital price of all such stocks, 
involving both past and present issues. 

If a government is obliged to issue stock for purposes 
of war or for the purpose of interior development, and 
if these issues are of sufficient magnitude to absorb the 
available capital seeking investment in government se- 
curities, the discount upon all government securities 
must increase. Thus, the admission of colonial secur- 
ities to the list of trustee stocks in England resulted in 
the absorption of a larger amount of trustee stock than 
the market could readily bear at that time. An advance 



384 ECONOMICS 

in the rate of interest was the result, this advance ex- 
pressing itself in a heavier discount upon all govern- 
ment securities. 

If in consequence of national peril any government 
increases its issues largely and there is difficulty in ab- 
sorbing these issues owing to the state of the special and 
of the general market, the result must be heavier dis- 
counting of all government securities in proportion to 
the magnitude of the operations. These considerations 
apply to all forms of government issues whether they 
are of a permanent or a temporary character. 

344. Public debts of various countries. — The public 
debt of Great Britain is very extensively held by bankers, 
not under compulsion (except by the Bank of England 
to a certain extent) , for the reasons explained above, but 
because of the facility of manipulating large funds which 
the public debt affords. It is held largely by the various 
government departments where balances of funds are 
kept for special purposes. It is held largely by officers 
of the law courts by way of investment of funds held by 
them on behalf of litigants, wards in chancery and the 
like. It is also held largely by trustees and as the fortune 
of many wealthy families. 

The Canadian public debt is held principally in Great 
Britain. It is on the list of stocks in which trustees 
may invest without personal liability and its fluctuations 
are subject to the same influences as those which affect 
other stocks of a like character. The fact that the lar- 
ger part of the Canadian debt has been incurred for 
productive purposes — for the construction of canals, 
railways, etc. — does not affect its value in the market. 
That value depends upon the general, credit and recog- 
nized stability of the government of the country, upon 
its taxing power, upon the assumed abihty of the people 



THE BUDGET AND PUBLIC DEBTS 385 

to meet their tax burdens, upon the state of the market 
for Canadian securities, as a whole, as well as upon 
the supply of and demand for capital for investment in 
general. 

The public debt of the United States was at one time 
held almost entirely in Europe, principally in Great 
Britain. During the Civil War, the national credit 
was low, and there was also at the same time, from 
numerous causes of which the Civil War in America 
was one, a period of financial strain in Europe. Amer- 
ican bonds thus fell in value because of the magnitude 
of the issues in comparison with the limited power of 
the market to absorb them. After the conclusion of 
the Civil W^ar, the United States readily rehabilitated 
the public finances and gradually reduced the Federal 
debt. 

The existing debt forms, through a forced loan by 
the banks, an integral part of the banking and currency 
system,^ and it is maintained chiefly for this purpose. 
The rate of interest which is payable upon it — 2 per 
cent — bears no relation to the market rate, nor does the 
price which the banks have to pay for the security de- 
pend upon transactions in the open market. The 
United States government is, indeed, rather in the posi- 
tion of a lender of money and credit than of a borrower 
of it. 

345, Temporary loans and loans for fixed 'periods. — 
When a government desires to borrow for purposes in 
which the demand for capital is recurrent, such as when 
capital is employed for the construction of public build- 
ings, or for other construction of a more or less durable 
but not of a permanent character, it is very usual to 
issue stock bearing a fixed rate of interest and provid- 

*See "Money and Banking," Vol. Yll of the Modern Business text. 
C— 1— 25 



386 ECONOMICS 

ing for redemption of the principal. The principal may 
be subject to repayment by instalments — annual or 
semi-annual — together with the interest, in which case 
the stock or bond is called a terminable annuity, to dis- 
tinguish it from the permanent annuity of the funded 
debt. Or the principal may be subject to repayment 
in instalments or in one payment, either at given periods 
or at one period. It may be payable by lot or in some 
rotation or the whole of the principal debt may be paid 
off at the termination of the period agreed upon. 

Terminable annuities are an important feature of Brit- 
ish finance. They are largely adopted to supply a 
means of dealing with sinldng funds,^ and they thus 
lead to gradual -extinction of debt. Large blocks of 
terminable annuities are frequently created and the 
funds involved are, therefore, removed from the con- 
solidated fund of the permanent debt (colloquially 
known as "consols") . 

Temporary loans may be effected in a great variety 
of ways. They may be issued as Treasury Bills which 
are practically promissory notes drawn by the govern- 
ment and payable for large round sums in six months, 
for instance. They are usually drawn in anticipation 
of receipts from taxes, although they may be drawn for 
the purpose of providing funds urgently required at a 
moment when the market for permanent loans or even 
for terminable annuities is not favorable for the issue 
of such securities. Of a similar character are the Eng- 
lish issues known as Exchequer Bonds. 

346. Conversion and redemption of public debts, — 
The conversion of a public debt from a debt at one 
rate of interest to a debt at a lower rate has occasionally 
been accomplished under favorable conditions of the 

*See "Investment and Speculation," Vol. IX of the Modern Business text. 



THE BUDGET AND PUBLIC DEBTS 387 

money market, and by means of financial skill. If a 
debt is contracted during times of monetary pressure, 
it may be issued at the rate of the market; in that 
case the issue will be made at par ; or it may be issued at 
a customary or fixed rate of interest and at a discount, 
which brings the price below par. 

In the former case it may be expedient, if possible, 
so soon as the monetary stringency ceases, to endeavor 
to replace the high interest bearing loan by another loan 
at a lower rate. This process is known as conversion. 

If, however, the issue has been made at a discount 
and at a rate which is lower than the market rate at 
the time of issue, the period at which conversion would 
be possible might be more extended because the financial 
authorities would require to wait until the market rate 
of interest fell to the point or below the point of the 
previously fixed rate. 

Conversion can only be effected advantageously at a 
time when the capital value of a stock is high and when 
the rate of interest is low. When Mr. (afterward Lord) 
Goschen succeeded in converting the means of the 
British National Debt, from a 3 per cent stock to a 
2 1-2 per cent stock, the 3 per cents were above par, and 
circumstances wholly favored the operation. As Chan- 
cellor of the Exchequer, he utilized his authority over 
the various public offices and institutions vdiich were 
large fiduciary holders of consols, and also his influence 
with the banks to effect the conversion of the debt by 
means of a step and an inducement. The step was 
from 3 per cent to 2 3-4 per cent for a period of years 
with automatic reduction to 2 1-2 per cent after the 
lapse of this period, and the inducement was in the form 
of a commission to the bankers who aided in carrying 
out the scheme. The operation cost a temporary mone- 



388 ECONOMICS 

tary sacrifice to the exchequer, and a subsequent annual 
saving in the amount of the annuity necessary to dis- 
charge the interest of the debt. 

It has been customary in Great Britain for many 
years to provide in the annual budget a fixed sum for 
the payment of interest upon the national debt. This 
sum has generally been fixed for an indeterminate series 
of years at a sum in excess of the requirements of the 
interest charge on the debt. The surplus is then by 
law devoted to redemption of the debt automatically. 
So, also, is any general surplus of the finances of the 
year from whatever source it may be derived. 

A realized surplus must be devoted to the redemption 
of debt. A general national balance cannot, therefore, 
be carried forward. In addition to automatic measures 
of this kind, there are frequent reductions of debt 
through the falling in of terminable annuities, and some- 
times an explicit amount is set aside for the discharge 
of a particular form of debt or for the purchase of the 
public funds. 

347. Industiial activity of the State. — The State may 
undertake to render certain public services or may un- 
dertake certain industries. In either case it may es- 
tablish a legal monopoly or it may permit competition. 

Legal monopolies established by the State are com- 
mon in Europe. The tobacco monopoly of Austria, 
the vodka monopoly of Russia, the match monopoly of 
France are examples. Where substitutes for the 
monopolized commodities cannot be procured or cannot 
readih^ be procured, the monopoly may be effectively 
maintained by means of the exercise of the powers of 
the State and the exaction of heavy penalties for in- 
fringement. 

These monopolies are sometimes established for the 



THE BUDGET AND PUBLIC DEBTS 389 

purpose of controlling public consumption of the 
monopolized commodity, as in the case of the Russian 
vodka monopoly, and sometimes for the purpose of 
securing a profit to the State as in the Austrian tobacco 
monopoly. The question whether or not the State is 
justified in making a profit out of its industrial enter- 
prises has been forced into prominence chiefly through 
the analogous case of municipal enterprise. 

Where the service rendered by the State or where the 
commodity manufactured by it is universally and 
equally used, there would be a strong argument for the 
service or the commodity to be supplied at cost; but 
there would be the same argument for its being supplied 
gratuitously. 

The conditions of universality and equality some- 
times exist in the case of bridges and of ferries. They 
may be said always to exist in the case of streets, parks 
and the like. The maintenance of the services repre- 
sented by these is therefore usually, although not invari- 
ably, defrayed out of the general revenues. In the 
case of commodities which are not in universal use or 
which, being in universal use, are used in varying quan- 
tities by different people, as in the case of the post office, 
telegraph and telephone services, of which people avail 
themselves to a varying extent, the arguments for the 
exercise of the monopoly by the State, in the same man- 
ner as it would be exercised by a private monopolist, are 
very strong. 

348. Responsibilities of State industrial enterprises. — 
The exercise of any monopoly, whether by the State 
or by private persons, is subject to certain limitations. 
If the monopolist desires to realize the maximum of 
profit out of his monopoly, the price which he will 
charge for it cannot be the highest price, but must be 



390 ECONOMICS 

the price which will result in a demand which will give 
the largest amount of net profit. Since the State may- 
be prevented by public opinion from obtaining the larg- 
est amount of net profit, the price charged by it for the 
service or for the commodity may not in practice be de- 
termined with that in view. It may, indeed, be so low 
a price that the cost of the service is not met by it. This 
is the case in the British State Telegraph System. The 
price of transmission of telegrams was fixed when the 
government took over the business of the companies at 
the low sum of sixpence for twelve words, with an addi- 
tional charge of a halfpenny for each additional word. 
It was supposed that the revenue from the telegraph 
service at so low a rate would suffice to pay the cost of 
the service. Experience has shown that the price is too 
low and that it does not meet the cost. The telegraph 
service has thus been maintained to some extent at the 
cost of the public. Other points in connection with the 
difficulty of maintaining the legal monopoly at cost are 
discussed elsewhere (p. 157). 

On political or humanitarian grounds it may be ex- 
pedient for the State to render services without explicit- 
ly charging for them to the people to whom they are 
rendered ; but fairness to the general taxpayer demands 
that such gratuitous services should be confined to those 
which are in their nature universally available. Fair- 
ness also demands that the commodities produced by the 
State should be supplied at a price to those who want 
them, such as they would have to pay to any private 
concern. 

The extent to which the State may advantageously 
engage in industrial enterprise must vary with varying 
conditions. Where the credit of the State is high 
enough to enable it to borrow capital at a lower rate of 



THE BUDGET AND PUBLIC DEBTS 391 

interest than is possible for a private company which 
is engaged in a particular industry, it may be socially 
advantageous for the State to acquire the industry. It 
may be that the State could realize, at least, the differ- 
ence between the amount of dividend which the private 
company paid and the amount of interest which the 
State would have to pay. 

In order to do so, however, the State would have to 
manage the enterprise in precisely the same way as the 
private company. The State might or might not be 
able to do so. Public opinion might demand so greatly 
increased facilities that the anticipated margin would be 
wholly obliterated. 



CHAPTER V 

LOCAL AND MUNICIPAL FINANCE 

349. Local government in its economic aspects. — For 
present purposes, local government may be divided into 
two sections — State or provincial government, and mu- 
nicipal or city government. The powers of administer- 
ing revenue and expenditure possessed by the State or 
provincial government depend upon its relation to the 
central or national government. In the United States 
the several states possess the permanent power; that is, 
the central government possesses the powers with which 
it is endowed by the constitution, and the several states 
possess, each within its own territoiy, all other powers. 

In Canada, the constitutional arrangement is exactly 
the reverse. The provinces are explicitly endowed with 
certain powers by the British North America Act and 
subsequent acts amending it, and the Dominion Parlia- 
ment or central authority is endowed with all other pow- 
ers in so for as such powers are consistent with the Act 
mentioned. 

In the United States, the national revenue is thus 
practically confined to indirect taxation because powers 
of direct taxation have been retained by the several states. 
In Canada, the Dominion Parliament derives the na- 
tional revenue from customs and excise and from the 
lands which remain at the disposition of the Dominion 
as distinguished from the provincial governments; but 
it would appear that the Dominion Parliament might, 

392 



LOCAL AND MUNICIPAL FINANCE 393 

if it elected to do so, impose direct taxation. The prov- 
inces cannot, however, impose any customs or excise 
duties, although they have imposed export duties upon 
logs and other commodities. 

350. Provi7icial taccatioii in Canada. — In provincial 
taxation, the example of Ontario has, in general, been 
followed by the other provinces. Each province enjoys 
a subsidy from the Dominion exchequer. The amount 
of this subsidy depends upon the proportion which the 
population of the other provinces bears to the province 
of Quebec, which is taken as the unit of calculation. 
The adoption of this method was apparently necessary 
at the time of Confederation, but the method possesses 
the serious drawback that the tax-paying body is not 
the spending body. This circumstance leads to frequent 
assaults by the provinces upon the Dominion exchequer 
for increase of the total amount of the subsidy, and these 
assaults are difficult to resist. The separation of finan- 
cial authority into two fractions tends to diminish the 
feeling of responsibilitj^ 

For fully twenty years after Confederation, the reve- 
nues of the provinces procured by means of the Dominion 
subsidy, the sale of timber lands and the granting of 
mining and other licenses sufficed to meet the expendi- 
tures of the respective provinces. The growth of de- 
mands upon the provincial governments for the construc- 
tion of public works — roads, bridges and the like — and 
the enormous growth of the demand for expenditure for 
educational purposes, brought about the necessity of 
seeking for sources of income other than those mentioned 
above. The history of the finance of Ontario was charac- 
terized bj^ the diminution of the revenue from the timber 
land as the large timber of the province came to be ex- 
hausted. 



394 ECONOMICS 

Under these circmnstances the provincial government 
imposed, to begin with, succession duties, and followed 
these by taxes upon corporations — banks, trust compa- 
nies, telephone companies, insurance companies and the 
like. The system which has been evolved is a highly 
complicated one, each different kind of company being 
assessed for taxes in a different manner. At present 
the taxes, as a rule, are not heavy, and for that reason 
they have not excited any serious antagonism; but the 
complexity of the system and the imj)ossibility of com- 
paring the burdens which are borne by different cate- 
gories of tax-paying corj^orations, contain the germs of 
future difficulties. 

351. Corporation taw an income tax. — The effect of 
the imposition of the taxes upon corporations irrespec- 
tive of the method by which they are assessed, is a tax 
upon the income of joint stock companies; but under 
the method of assessment the revenue does not increase 
as that income increases, because the taxes are, as a rule, 
imposed upon the capital of the companies in some form 
or another — on railway per mile of line, on banks upon 
their capital and the like. The absence of automatic 
elasticity of the revenue is a serious drawback to provin- 
cial finance because more or less irritating changes will 
have to made in order to provide for an increasing ex- 
penditure. 

When Confederation of the Canadian provinces came 
into effect in 1867, the Dominion administration took 
over all the existing public w^orks of the provinces, tak- 
ing over at the same time the public debts of the prov- 
inces. These public works consisted chiefly of canals, 
docks, lighthouses and the like. Until the period of 
Confederation, the provinces had not constructed any 



LOCAL AND MUNICIPAL FINANCE 395 

railways, although they had granted subsidies to rail- 
way companies both in land and in money. 

The Province of Ontario has more recently con- 
structed a line which extends from the Canadian Pa- 
cific and Grand Trunk Railways at North Bay into 
northern Ontario. This line, known as the Temiska- 
ming and Northern Ontario Railway, was intended orig- 
inally to facilitate the transportation of lumber from that 
region and to facilitate, also, its colonization, as the tim- 
ber areas became gradually available for settlement. 
The discoveries of silver and gold in the Cobalt, Porcu- 
pine, Gowganda and other districts gave unexpected 
opportunities to the railway. The line which is operated 
by a commission appointed by the Ontario government 
has thus been a financially successful undertaking. The 
capital for the construction of the line was raised in Lon- 
don on the general credit of the province. 

352. Utilizi7ig prison labor.- — The Province of On- 
tario has embarked upon an experiment in prison admin- 
istration which has important economic aspects. Prison 
farms have been established in which prisoners who have 
been sentenced for misdemeanors for periods of not more 
than two years are set to outdoor instead of indoor labor. 
They are occupied in building the necessary buildings, 
making roads and bridges, in cultivation, and in the 
manufacture of cement for use in other government in- 
stitutions. The advantage from the point of view of 
prison hygiene is veiy manifest, but the experiment has 
not been in progress for a sufficient length of time to 
justify a judgment upon its cost. Experience elsewhere 
has shown that the system possesses great advantages 
for the prisoners, but that its cost is greater than that 
of simple confinement, owing to the inefficiency of forced 
prison labor. It is obvious that in so far as the prison 



396 ECONOMICS 

farm produces a surplus over»and above the requirements 
of the prisoners on the farm, it competes in the market 
with the produce of the free farmers who contribute to 
its maintenance. Even if the surplus produce is used 
in other governmental institutions, it competes with the 
produce of the free farmers, who otherwise would con- 
tract for supplies for them. The question of prison labor 
is, however, insoluble on exclusively economic grounds. 

353. Municipal finance. — On the continent of Europe 
a large part of the revenue of municipalities is derived 
from market tolls and from octrois or municipal import 
duties collected at the entrances to cities. The latter 
form of revenue is impracticable excepting where the 
cities are walled and where entrance to them can be regu- 
lated at a comparatively small number of barriers. In 
Great Britain, market tolls form a considerable part of 
the revenue of some of the towns, but the major part of 
the revenue is derived from taxes upon real property. 
These taxes are imposed not upon the estimated value of 
the property, as is customary in Canada and the United 
States, but upon the actual or estimated rental. This 
system has the result that property which is not in 
actual use is not assessed for property tax; it also has 
the result that frequent revaluation of real property is 
not necessary, the amount of rent being known, the tax 
follows automatically. 

On the continent of Europe and in Great Britain, ex- 
emptions from taxation are rare. National and munici- 
pal property is exempt from municipal taxation, but 
otherwise all occupied premises are taxed. 

The system of municipal taxation in vogue in Canada 
and the United States involves generally an annual valu- 
ation of real property in order to assess it for taxation 
purposes, the tax being levied upon its estimated value 



LOCAL AND MUNICIPAL FINANCE 397 

whether it is occupied or not. This system has arisen 
because of the prevalence of the practice of holding land 
within urban areas for speculative purposes. It was 
thought that taxation would compel owners of such land 
to sell it or to occupy it. While after the collapse of 
real estate booms, land is often sold in quantity for taxes, 
the effect of the system does not appear to have been 
the discouragement of speculation, except by weak hold- 
ers of small lots. Strong holders have been able to pay 
the taxes out of other sources of income or to borrow 
the amount necessary to pay them and hold the land for 
an anticipated advance in price. 

354. Tax exemjJtion. — In the Canadian cities and 
towns the area of exempted land and the value of ex- 
empted buildings is very great. All ecclesiastical prop- 
erty, excepting where such property is leased for other 
than ecclesiastical purposes, is exempt; so, also, is all 
property used for educational purposes, whether it is pos- 
sessed by public or by private institutions. The compe- 
tition of the urban centers with one another has also 
led to the exemption of certain factories from taxation 
for a period of j^^ears, as well as to the payment of 
bonuses to certain factories. The aggregate of such 
exemptions is great enough to make a material differ- 
ence upon the tax rate. 

355. Municipal expenses dependent upon age of city. 
— The ambition of the cities in the United States and 
Canada, the pressure of the owners of real estate and 
the relatively great extent of the cities, enclosing as 
they often do large spaces unoccupied or only partially 
occupied, have together resulted in exceedingly large 
expenditures for roads and streets. The climate of the 
northern towns causes the streets to deteriorate rapidly, 
no street-making material which will resist the effects 



398 ECONOMICS 

of the great range of temperature between summer and 
winter, and of sudden changes of temperature, having 
yet been discovered. 

When comparing the expenditures of different cities, 
and especially the expenditures of cities in America with 
those of Europe, the difference in the age of cities must 
be taken into account. Much municipal expenditure is 
of a permanent character. There are cities in Europe 
whose civic buildings were erected in the middle ages 
and whose bridges, boulevards and parks have all been 
provided by previous generations. In America all these 
have been provided out of taxation almost within the 
current generation for a great many large cities and 
for all cities well within one century. 

356. Muiiicipal debts. — The debts of the municipali- 
ties in Canada and the United States are thus very large, 
and they are, moreover, increasing rapidly. The public 
continually demands that the municipality should under- 
take fresh civic duties, that it should undertake the 
administration of street railways, electric lighting, the 
provision of electrical power and the like. The total 
of municipal obligations is thus steadily mounting, and 
municipal finances are not always skilfully managed. 
In Europe, although compared with the population of 
the cities in America, the municipalities are less heavily 
burdened with duties, municipal offices are customarily 
filled by well-paid professional persons. In the United 
States and in Canada there is a disposition to underpay 
civic officials, with the result that the services are often 
less competently rendered than are similar services in 
private employment. The duties imposed upon munici- 
pal councillors are also so burdensome that it is often 
difficult to obtain competent persons to undertake them, 
and they are frequently left to be undertaken by inferior 



LOCAL AND MUNICIPAL FINANCE 399 

types of local politicians. The result of these conditions 
have become apparent in the municipal scandals whicli 
have from time to time been exposed in American mu- 
nicipalities. 

357. Methods of assessment for municipal taoces. — As 
indicated above, the system of assessment generally in 
vogue in Europe involves the taxation of rent or annual 
value, while the system generally in vogue in the United 
States and in Canada involves, in general, the taxation 
of estimated total value. In the former case, the ques- 
tion of discrimination between land and buildings does 
not necessarily arise ; in the latter, the total value is usu- 
ally arrived at by addition of the estimated value of the 
land to the estimated value of the buildings where such 
exist upon the land. 

The relatively great expenditure in American munici- 
palities, the causes of which have already been alluded 
to, has led to the desire to find new methods of taxa- 
tion. In some of the cities where considerable areas of 
land are being held for speculative purposes at high 
prices, movements have developed having for their ob- 
ject the elimination of buildings and improvements 
from the assessment rolls, and the imposition of the 
larger portion or of all the municipal taxes upon the 
estimated value of land. Application of the principles 
of taxation to a case in which this policy has been carried 
into effect will show the nature of the reactions which, 
under given conditions, will take place. 

In those cases in which the land which is subjected to 
taxation is not in use, the tax will be a tax upon capital 
or upon income derived from other sources than the land 
in question. If the owners of the land are financially 
strong enough and are sufficiently optimistic to pay the 
taxes and to hold the land they will in all hkelihood do 



400 ECONOMICS 

so. If the holders are weak financially or are pessimis- 
tic as to the effect of special taxation upon the market, 
they will throw their land on the market. Should the 
latter class be numerous and should the land owned by 
them represent a considerable proportion of the unused 
land a fall in the price of such would be inevitable. As 
the price falls, so must the yield of taxes, and as the 
yield falls the tax rate must be increased in order that 
the revenue may be maintained. The idea seems to be 
prevalent that under the pressure of increased taxation, 
unused land will be forced into use, but land cannot be 
used unless there is demand for it, and demand cannot 
be forced, although it may sometimes be induced by a 
fall of price. 

Where land is used, the taxation will fall upon the 
user and w^ill be paid out of the gross rent. Under con- 
ditions of mobility of property in land, the net rent re- 
ceivable will determine the price of it, estimated future 
increments of value being discounted. Excessive taxa- 
tion must in this case also depress the price of the land. 

The increase of taxation upon land and the elimination 
of improvements from the assessment rolls may appear 
to induce improvements, but improvements cannot be 
effected by this negative means. They can only arise 
from demand; and if they do so arise, the tax will fall 
upon them irrespective of nominal elimination. Mean- 
while, however, a disturbance of the economic equilibrium 
of the area must take place. The magnitude of the ef- 
fects described must depend upon the magnitude of the 
tax. It should also be observed that the ostensible 
elimination of buildings and other improvements from 
the assessment rolls may affect municipal credit, even 
if it only apparently diminishes the security for munici- 
pal loans. 



LOCAL AND MUNICIPAL FINANCE 401 

358. Municipal administration. — The policy of cen- 
tralization, which began with the gradual extinction of 
the independence of the medieval towns, was carried on 
the continent of Europe to its highest point in the 
eighteenth century, France leading in subordinating 
local to national interests. The English system of local 
government did not conform fully to the continental 
model. Until the date of the reform of the municipal 
corporations in 1835, there was a considerable amount 
of local autonomy. The powers retained by the English 
towns were not, however, always wisely exercised. There 
appears to have been a considerable amount of civic 
corruption and, in general, there was a parochial spirit. 

The consolidation of the United Kingdom, which be- 
gan after the union between Great Britain and Ireland 
in the beginning of the nineteenth century, demanded 
a policy of centralization which, however, was not car- 
ried so far as was the case in France. The civic corpora- 
tions were shorn of much of their ancient powers, and 
were in effect completely subjected to the control of 
Parliament. 

This process had two results. It overloaded Parlia- 
ment with local affairs, and it diminished civic pride and 
prestige. The first result of the process of centraliza- 
tion led eventually to delegation of the powers of Par- 
liament within certain limits to local authorities. This 
change endowed the cities and towns with, in some re- 
spects, more definite powers than they had had before, 
although they remained subject to the control of Par- 
liament and of the national administration through their 
relation to the local Government Board. This board is 
a government department which has at present, for rea- 
sons which will shortly appear, no analogous department 
either in the United States or in Canada. 

C— I— 26 



402 ECONOMICS 

359. Local Government Board in England. — The 
local Government Board is a board only in name. The 
political head of the department is usually a cabinet 
minister; the effective functionaries are permanent civil 
servants. The function of the Board is to supervise local 
administration, to make inquiry into the nature of civic 
expenditures whether by Town Councils or by Boards 
of Guardians (Poor Law boards) as occasion arises. 
Municipal loans are sanctioned by the Board, often after 
a local inquiry as to the rieed of the loan conducted 
publicly by an official of the Board. These loans are 
made by the Commissioners of the National Debt, on 
terms which simply defray the cost of the loan, which 
is effected by means, not of the civic, but of the national 
credit. Periods for the amortization of the loan are 
arranged according to the purpose for which the loan 
is made. 

Under this system, municipalities are not permitted 
to raise money except for essential services, until they 
are able to show that these services are fully rendered. 
Thus, municipalities were prevented from establishing 
telephone services on their own account because their 
system of sewerage or their water supply was inade- 
quate. 

360. Local independent action. — This system of 
checks and balances notwithstanding, the English and 
Scottish cities embarked in many enterprises in conse- 
quence of the facilities which they enjoyed of raising 
money at low rates. Some of them, owing to the posses- 
sion of ancient funds (as is the case of Glasgow, where, 
although the city had a civic debt, it had also an en- 
dowment known as the Common Good) , or owing to the 
possession of exceptional powers under special Acts of 
Parliament, were able to raise funds otherwise than 



LOCAL AND MUNICIPAL FINANCE 403 

through the Local Government Boards/ By means of 
such special powers, some of the cities received money 
on deposit, paying a rate of interest slightly in excess 
of the rate allowed by the banks and some of them 
issued promissory notes at short dates. These notes, 
usually for amount of £100,000 ($486,666), were sold 
in the money market, occasionally being sold abroad. 

361. Municipal entei'prise. — These facilities, taken 
together, enabled the cities to build docks (as at Liver- 
pool), to engage in the constriction of canals (as at 
Manchester), to acquire, and operate water works, gas 
works, electric lighting plants, tramways (street rail- 
ways), water works for hydraulic power at high pres- 
sure, works for the supply of pneumatic power, tele- 
phone systems, and the like. 

These enterprises were estabhshed from various mo- 
tives. Sometimes the services had been rendered by com- 
panies which held franchises for short periods only with 
doubtful prospects of renewal. Under such circum- 
stances, it was impossible for the companies to secure 
capital sufficient for needed extensions owing to the pos- 
sibility of practical confiscation at the end of a short 
period. Sometimes the revenue from the services was 
insufficient to attract the necessary amount of capital, 
even where the franchises were indeterminate. In such 
cases the city was practically obliged to undertake the 
services on its own account. Sometimes the franchises 
were a source of considerable profit, and it appeared to 
the municipal authorities that this profit might be earned 
by a municipal department and might be employed in 
the reduction of general civic taxes. Occasionally, mu- 
nicipal services were undertaken out of enthusiasm for 

'There are three such boards, one for each of the three kingdoms. 



404 ECONOMICS 

municipal ownership. This motive, however, arose at a 
late stage. 

362. I7icreased municipal indebtedness results. — The 
consequence of the embarkation of many municipalities, 
practically simultaneously, in enterprises of various 
kinds, each involving the investment of large sums, was 
a great increase in municipal indebtedness. Municipal 
securities became a drug in the market, and the addition 
to the national borrowing on municipal account con- 
tributed, with the general advance in the rate of inter- 
est, to depress the price of national securities. The de- 
velopment of municipal enterprise was thus checked; 
and the margin of difference between the rate of interest 
which the municipality was obliged to pay for the 
capital borrowed by it, and the rate of interest or divi- 
dend yielded by investment in private enterprises dimin- 
ished. 

Meanwhile the difficulties inherent in all public en- 
terprises developed. The people who availed them- 
selves of the municipal services began to clamor for a 
reduction of the prices of the services rendered by the 
municipality under conditions of legal monopoly. In 
some cases the prices were temporarily or permanently 
reduced and the profits dwindled or disappeared ; in some, 
the prices were maintained and the profits used to dimin- 
ish the rates ; in other cases, the profits were too slender 
to excite interest. 

363. Municipal enterprise in England not wholly a 
success. — The general provisional conclusion from the 
available evidence upon municipal enterprise in Great 
Britain to be drawn is that, in that country, under the 
most favorable circumstances, municipal enterprise is a 
qualified financial success. It has not resulted in mate- 
rial diminution of the local rates, but it has undoubtedly 



LOCAL AND MUNICIPAL FINANCE 405 

contributed to the revival of civic spirit and to greatly 
increased interest in civic affairs. 

In its more purely economic aspects, the chief diffi- 
culties which have arisen are these: reluctance to re- 
munerate technical ability to a sufficient extent to pro- 
cure competent management; reluctance to provide a 
sufficient amount for depreciation of plant; and a ten- 
dency to transfer to departments which are exclusively 
spending departments (such as the department con- 
cerned with the maintenance of streets), charges v/hich 
properly have been incurred by earning departments, in 
order to make the latter show a profit. The influence of 
the employees of the civic enterprises, who are also voters 
on the municipal list, has occasionally been aggressively 
exerted in order to procure for themselves benefits at the 
public expense. 

364. In the United States. — In the United States, 
the cities have not been subjected to the centralizing in- 
fluences which we have recognized as characterizing the 
relations between the cities and the national government 
both in France and in Great Britain. The cities of the 
United States have retained much of the independence 
which was possessed by the English cities at the period 
of the Declaration of Independence of the American 
Colonies. 

The civic independence in the American colonies was, 
however, used by the American cities in a manner very 
similar to that in which the English cities used their 
quasi-independence. They became corrupt and paro- 
chial. The municipal reform of 1835 did not touch the 
United States, and the reform of the municipal corpora- 
tions there was long delayed. Apart from the individ- 
ualism which in general characterizes the people, there 
has been a certain distrust of local authorities. These 



406 ECONOMICS 

have rarely enjoyed the confidence of the people to an 
extent sufficient to entitle them to endowment with the 
powers necessary to the successful conduct of municipal 
enterprises. Occasionally these powers have been given 
and withdrawn. There have, however, from time to 
time, arisen demands for the extension of municipal en- 
terprise. 

365. In Canada. — In Canada, the case is somewhat 
similar except that the growth of the cities is more re- 
cent than is the growth of cities in the United States. 
The rapid expansion of the Canadian cities and the 
difficulty of finding adequate capital to provide plants 
for the performance of the civic functions, even upon a 
modest scale, have retarded the growth of municipal 
enterprise. But desire to emulate European cities in the 
management of public services by the municipalities, and 
the desire to relieve the burden of taxation by the con- 
sequent profits, have combined to create a large body 
of opinion in Canada toward the extension of municipal 
functions. 

366. Municipal officials. — The effect of this extension 
upon the character of the municipal bodies has already 
been noticed. The greater the number of enterprises, 
the more arduous become the duties of municipal coun- 
cillors and the more difficult it becomes to obtain mem- 
bers of the councils sufficiently public-spirited, disinter- 
ested and able to undertake these duties. This difficulty 
has emerged in every countiy. The growth of the cities 
and the increasing complexity of their administration 
has brought it more and more into relief. 

In Germany the difficult}^ has been overcome by pro- 
fessionalizing municipal administration. Those who en- 
ter the service of civic governments are educated for the 
purpose, and those who exhibit special qualifications are 



LOCAL AND MUNICIPAL FINANCE 407 

promoted from one municipal office to another, often in 
different towns, until they are appointed civic chiefs. A 
burgomaster who has successfully administered the affairs 
of a small town is promoted to be burgomaster of a 
larger one. This system undoubtedly contributes to effi- 
ciency in civic government, but it deprives municipal life 
of its democratic character and subordinates it to the 
general bureaucratic system of the State. 

Great Britain has not adopted this plan. Until recent 
times there has been a sufficient number of public-spirited 
members of the leisure class to draw upon for mu- 
nicipal and other 23ublic services without compensation 
from the public purse. There has, moreover, long been 
in practice the method of appointing highly paid pro- 
fessional men to the important civic offices, and while 
the direction of the policy of the municipal government 
has remained in the hands of the unpaid elected repre- 
sentatives of the citizens, the actual administration has 
been entrusted to these officials. This practice, however, 
of late years has been considerably modified. 

In the United States and in Canada, the numerical 
insignificance of the leisure class has rendered it neces- 
sary, in the first instance, to compensate the members 
of the municipal councils and, in the second, to pay the 
civic chief such a salary as will enable him to devote 
the whole of his time to the affairs of the city. 

The mayor is not, however, as in the English cities, 
elected by the municipal council nor, as in continental 
cities, is he appointed by the government. In America 
he is elected by the citizens at large. The period during 
which he holds office varies in the United States. The 
usual period is four years. In Canada the period is one 
year, although the holder of the office is customarily 
elected for a second year. The method of election and 



408 ECONOMICS 

the shortness of the period appear to militate against the 
selection of first-rate men. Such men will not abandon 
professional careers under these conditions. 

367. Agitation for commission goverrwient. — The re- 
sults of municipal administration in the United States 
and Canada are widely regarded as having not been 
favorable. With the object of reforming it, some cities 
have adopted the plan of reducing the number of the 
municipal body to three or five, and have attached to its 
membership a salary sufficient to attract professionally 
qualified persons and to enable them to devote the whole 
of their time to municipal affairs. This method, known 
as commission government, seems to be a step toward 
professionalizing municipal administration. It is, how- 
ever, in a transition stage, for the commission is usually 
elected by popular election for a short period, and this 
circumstance renders the commissioners dependent upon 
popular favor. So long as the municipal councillors had 
their own means of livelihood they were independent of 
the electors whom they represented, but the commis- 
sioners are public servants on short tenures, and are there- 
fore peculiarly exposed to the temptation of endeavoring 
to conciliate particularly influential interests. Like the 
German system, commission government diminishes the 
democratic character of municipal life, but, unlike the 
German, it does not present the advantage of a system 
of training experts for municipal administration. 

368. Economics of municiijol enterprise. — The mu- 
nicipal debts of the European cities are generally held 
in the cities themselves, owing to the large numbers of 
the investing public who reside in them or have con- 
nections with them. The municipal debts of cities in 
the United States and in Canada are, in general, held 
elsewhere than in the issuing cities. A very large part 



LOCAL AND MUNICIPAL FINANCE 409 

of the funds borrowed by them have been borrowed in 
the open market abroad. Every new enterprise mider- 
taken by the cities involves an addition to the debt, and 
each new demand upon the money market is looked upon 
with diminished favor. The consequence is, that, espe- 
cially when capital seeking such investment is scarce, the 
cities find it necessary to pay relatively high rates of 
interest and the margin of advantage between private 
and public ownership, from the point of view of the 
interest upon invested capital, tends to diminish. While 
the possession by a city of the public services which are 
indispensable to its existence may be advisable on eco- 
nomic grounds, the question of the acquisition of any of 
these at a particular moment must be subjected to criti- 
cism applicable to the local and general conditions. 

The chief advantage of municipal enterprise, in an 
economic sense, lies in the saving to the public of the 
difference between the interest paid for the capital bor- 
rowed on the public credit and the interest plus profits 
earned by a company rendering the same service, civic 
and other taxes, allowances for depreciation and risks of 
all kinds being taken into account and equal skill in man- 
agement being assumed. An advantage would also lie 
in the avoidance of divided control of the streets, and in 
the absence of the disputes which arise when the fran- 
chise is entered into and as it is nearing its termi- 
nation. 

On the other hand, the disadvantages are many. 
Perhaps the most important is the possibility of the 
conduct of the business being determined on political 
rather than on economic grounds, as regards employ- 
ment and as regards charges to the public for the serv- 
ice. A municipal service, for example, is often over- 
burdened with employees, and it is sometimes conducted 



410 ECONOMICS 

at ineconomical rates. In either case, the general tax- 
payer must suffer. 

Municipal services are peculiarly liable to inertia. 
People will tolerate in a service rendered by themselves 
or in their name incompetence which they will not tol- 
erate in a service rendered by a company. This inertia 
makes its appearance most conspicuously where, in con- 
sequence of the necessity of protecting a legal monopoly, 
a city finds itself obliged to acquire a substitute for it 
which may appear as a rival. For instance, if a city 
acquired a street railway and obtained a legal monopoly 
of such a method of transportation, it might be necessary 
for the city to acquire also motor omnibuses if they 
threatened to compete with the established system. 

Cities which possessed a gas plant and a legal monop- 
oly of the supply of gas have been obliged to acquire 
an electric lighting system in order to avoid external 
competition with their gas, and have also been obliged 
to check the development of electric lighting because it 
interfered with their gas business and diminished the 
value of their gas plant. 

The circumstances that a loan for a municipal enter- 
prise constitutes an addition to the civic debt and that 
each addition to debt renders each further addition 
less easy and in general more costly is a further disad- 
vantage. 



CHAPTER VI 

SOCIAL LEGISLATION 

369. Factory acts. — While each of the topics which 
are the subjects of the following pages might have been 
discussed appropriately under one or other of the forego- 
ing heads, there is a certain advantage in grouping to- 
gether those numerous legislative experiments which 
have been in progress for about thirty years, and which 
are known collectively as social legislation. During that 
period many plans, not in themselves new, have been 
given a new direction. 

The social legislation of modern times may be held to 
have had its starting point in the English Factory Acts. 
No other country by the middle of the thirties of the 
nineteenth century had advanced so far in individual 
development by means of mobile hired labor as had Eng- 
land, and none of them had experienced the concentra- 
tion of industry to the extent to which England had 
experienced it. Practically, at that time, the factory 
was an English affair, and it was, therefore, inevitable 
that English legislation concerning factories should be 
the first. 

The earlier factory acts were chiefly concerned with 
sanitation because in the rush of the beginning of the 
factory industry, many buildings were used for factories 
which were not constructed for and were not suitable 
for factory occupation. Under the domestic system 

411 



412 ECONOMICS 

workers had been crowded into small rooms, and the 
conditions, in general, were probably similar to those 
which may be seen now in the small workshops in the 
Far East. 

In the cities of South China, weaving shops, where 
half a dozen hand loom weavers are employed, are often 
almost without any light and are destitute of any kind 
of comfort. They are mere holes in which naked weav- 
ers toil at their looms. 

There were some industries in which workmen em- 
ployed themselves and used their own simple tools under 
conditions which were healthful and agreeable. Some 
of the handloom weavers in country villages were exam- 
ples of this. But throughout western Europe thei-e were 
others, as there now are others, the factory industry not- 
withstanding, in which the conditions of labor were and 
are extremely undesirable from a social point of view, 
although it is almost impracticable to legislate in respect 
to them. These domestic industries are no doubt grad- 
ually disappearing, but recent conspicuous examples 
were umbrella covering and paper bag making. A con- 
siderable amount of ready-made clothing is partially 
made by workers in their own homes. Chains are also 
made in this way in England in the Sheffield district. 

The conditions of the period of domestic industry were 
carried forward into the new era; but the greater con- 
centration of workers together with the greater pressure 
due to the employment of machinery rendered contin- 
uance of these conditions highly undesirable. It was in- 
evitable, however, that public opinion and legislation 
should grow slowly. The factory industry was strug- 
gling into existence. Undue severity in legislation 
might easily have retarded its progress by diminishing 
the margin of advantage between the new and the old 



SOCIAL LEGISLATION 413 

form. The old form might have continued without being 
subject to the legislative restrictions of the new, and 
thus its undesirable features might have been perpet- 
uated. 

The efficiency of the administration of the factory- 
acts in all countries depends upon the existence of a 
properly trained and upright factory inspectorship. The 
appointment of politicians or their nominees without 
technical knowledge to such positions is indefensible, 
and, moreover, it retards effective legislation. Under the 
laws both of the United States and of Canada the fac- 
tory inspectorship is under the control of the state and 
provincial governments, respectively. In both cases 
politics play a large part in the appointments. 

370. The working day. — The question of the number 
of working hours, especially of women and children, ex- 
ercised the minds of the advocates of the Factory Acts 
almost from the beginning, together with the question 
of a minimum age limit for children working in factories. 
The argument for differentiating women and children 
from men, in respect to statutory working hours, rested 
upon the belief that women and children were less able 
to assert themselves, and to complain of unhealthful or 
unsuitable conditions than were men, and that, there- 
fore, they must be taken under the special protection 
of the State. In those industries, however, in which the 
labor of women and children w^as combined with the labor 
of men, as in textile factories, in dye works and others, 
the fixation of a statutory minimum for them involved 
i! a statutory minimum for the factories in which they were 
■ employed. 

[ In Great Britain, the passing of the nine-hour law 
J for such factories led to similar legislation in other coun- 
I tries. The most important check upon the working of 



414 ECONOMICS 

children In factories was the institution of a system of 
compulsory education. Provision was made for half- 
timers, or children who attended school for half the day 
and worked in the factory for the other half. This 
system had the drawbacks or the advantages, according 
to the point of view which may be taken, of practically 
binding the children to factory labor and of foraiing a 
special class of half-educated persons. This latter re- 
sult has been considerably modified in the larger cities 
by the establishment of a system of "continuation 
schools." 

But the question of a statutory working day has long 
ceased to apply exclusively to women and children. The 
claim has been urgently advanced in every country that 
the workingman is entitled to a greater amount of leis- 
ure and that, trade union regulations notwithstanding, 
the hours of labor in many industries have been excessive. 
The case of railway servants appeared to be especially 
strong because it was shown that engine drivers, brake- 
men and signalmen, whose alertness was of the greatest 
importance for the public safety, were frequently on 
duty for a longer period than it was considered possible 
for a human being to remain in a state of unremitting 
attention. Legislation, for the benefit of such cases, 
has been passed by many countries and railway com- 
panies have been prosecuted for imposing too prolonged 
duties upon certain classes of their workmen, 

371. Factors to be considered. — It is obvious that all 
occupations cannot be dealt with on the same footing. 
Some labor is too exhausting to be continued for many 
hours. The driver of an express train over a difficult 
section of a line may find himself exhausted at the end of 
two or three hours, while the driver of a slow train may 
be able to perform his duties perfectly well for two or 



SOCIAL LEGISLATION 415 

three times that period. From the point of view of 
physical fitness, therefore, a hard and fast rule applicable 
to all occupations cannot be laid down. From the same 
point of view, while there is an invincible argument 
against working a man for, say, forty-eight hours con- 
tinuously, whether he is willing to work or not, the argu- 
ment acquires less force with the diminution of each 
hour. When the number of working hours is brought 
down to ten, there is less reason to reduce it to nine and 
still less to reduce it to eight or six by legislative enact- 
ment. 

Apart from the question of physical fitness, there is 
the question of the working force requisite for a certain 
amount of production. If work is continuous and three 
shifts of workmen are employed, each shift working 
eight hours a day, a certain product per man employed 
will result. If four shifts are emploj^ed, each shift 
working six hours a day, either the labor of the six-hour 
day must be as productive as that of the eight-hour day 
or the product will be less. Even if the workmen were 
obtaining the whole product of their labor, it is clear that 
thej^ would require to produce as much in six hours as 
they formerly did in eight, or the amount receivable by 
each of them could be less. It is true that the labor of the 
earlier hours of work is in general more productive and 
the labor of the later hours progressively less until ex- 
cessive fatigue puts a stop to labor altogether, but it is 
not necessarily an advantage to concentrate exertion into 
a small number of hours in order to enjoy complete idle- 
ness for the rest of the day. 

An arbitrary and universal eight-hour day would be 
a great advantage to those workmen who could employ 
their leisure time in promoting their own welfare in a 
high sense; but there would be little individual and no 



416 ECONOMICS 

social advantage in work at high pressure for a few 
hours with empty leisure at the end of it. While mere 
quantity of physical product is not in itself a desirable 
social end, it is desirable from a social point of view that 
sufficient production should take place to enable the 
various communities, of which the working world is com- 
posed, to enjoy as high a standard of material comfort 
as possible. That this sufficient production should be 
effected without the exploitation of any, either by a part 
of the community or by the whole of it, is certainly a 
desirable social end and this end would appear to be 
accomplished more certainly by improved organization 
of production in such a way as to diminish exhausting 
toil, rather than by the negative process of imposing, 
arbitrarily and universally, a statutory number of hours 
of enforced leisure. 

The problem of the working day must, indeed, be 
attacked in detail. In those occupations in which labor 
combinations are ineffectual in securing reasonable con- 
ditions as regards the number of working hours — because 
the pressure of competition for employment is so great 
or because of inherent difficulties of combinations in the 
particular occupations — it may become the duty of the 
State to prevent the exhaustion of its working force by 
limiting the number of working hours. The influence 
of the diminution of working hours upon the methods of 
wage payment would have to be taken into account. 
If it led to an extension of the piece-work system and if, 
in this way, it rendered the combination of labor more 
difficult, the reactions might be unfavorable to the inter- 
ests of labor taken as a whole. 

372. Accident compensation. — Under so-called Em- 
ployers' Liability Acts, which were in force in many 
countries, employers were liable to the extent of their- 



SOCIAL LEGISLATION 417 

means for damages to workmen in consequence of injury 
received by them in the course of their employment. 
The employer could, however, in certain cases, plead in 
defence at common law that the injury was committed, 
not by his negligence, but by the negligence of a fellow 
employee of the injured man and that, therefore, the 
employer was not liable. The employer could also plead 
contributory negligence on the part of the injured work- 
man. 

The defences of common employment and contribu- 
tory negligence appeared to neutralize the benefits of 
the statute law of employers' liability, and there arose 
gradually in Great Britain, on the continent of Europe, 
and in America, a demand that the basis of the law 
should be altogether altered, and that injured workmen 
should be compensated for industrial accidents provided 
these occurred out of or in course of their employment, 
whether a fellow servant had been guilty of negligence 
or not, while the onus of proof of contributory negli- 
gence on the part of the workman himself should be 
thrown upon the employer. It was widely held that the 
industrial system should, by some means, be compelled 
to pay compensation for injuries received in its service, 
instead of leaving injured workmen to their own re- 
sources or to those of public or private charity. 

This view led eventually, after much discussion, to 
the adoption in Germany, Austria and France of some- 
what varying types of compulsory insurance against in- 
dustrial accidents and, in England, to successive Work- 
men's Compensation Acts. In the United States, in the 
present state of the Constitution, it would appear that 
the regulation of industry within each state is the affair 
of that state and that the Federal government would be 
encroaching upon the rights of the several states if it 

C— 1-27 



418 ECONOMICS 

were to administer a general law. The chief industrial 
states have thus separately attacked the question. Sev- 
eral acts have been passed, varying in important details. 
Some of the legislation and proposed legislation has fol- 
lowed the English model ; but most of the acts which have 
already been passed have followed the model of Ger- 
many. The German system may, for this reason, first 
be described briefly. 

373. Ger^man accident insurance. — Every industrial 
enterprise in Germany, upon an extended list of indus- 
tries, must belong to one of a series of groups which are 
arranged chiefly with regard to the relative hazards, the 
most hazardous industries being at one end of the scale 
and the less hazardous being at the other. In each in- 
dustrial center, the local industries are classified in these 
groups and for each group there is formed an association 
of emploj^ers in the industries of the group. There is 
also formed a similar association of workingmen in each 
group of industries. The administration of the whole 
system is in the hands of the Imperial Insurance Depart- 
ment. The direct cost of the system is divided between 
workingmen, employers and the State. All working- 
men must contribute to the so-called Sick Funds. These 
are maintained by the contributions of insured persons 
and of emploj^ers. The proportional burdens are, upon 
insured workmen, two-thirds and upon employers one- 
third of the amounts necessary to maintain, at a certain 
fixed rate, injured workmen for four weeks after the 
expiration of three days from the date of the accident. 

The same proportions apply to the funds necessary to 
provide sick allowances to such workmen, with the addi- 
tion of sixteen and two-thirds of the previous earnings 
of the workmen, which amount is contributed by the 
employers or by the accident associations composed of 



SOCIAL LEGISLATION 419 

them. If disability lasts for a longer period than thir- 
teen weeks, the funds are provided entirely by the acci- 
dent associations to which the employers are the sole 
contributors. The benefits paid to injured workmen 
for temporary disabihty amount for the first five weeks 
to one-half of the average daily wage customary in the 
craft of the injured workman. [The maximum wage 
upon which the compensation is to be determined is six 
marks ($1.43) per day.] From the fifth to the thir- 
teenth week of disability the compensation is two-thirds 
of such average wage. Should the disability endure for 
a longer period than thirteen weeks, it passes into the 
category of permanent disability. 

Free medical attendance, drugs, eye-glasses and sur- 
gical apparatus are provided in addition to the compen- 
sation. In cases of permanent disability a pension of a 
maximum amount of two-thirds of the annual earnings 
up to 1,800 marks ($428.40) is paid for total disability, 
excess of wages above the amount named being reckoned 
to the extent of 30 per cent. The amount of the pen- 
sion varies in respect to the disability. 

The payments are made monthly, in case of death, to 
the widow, who until her death or remarriage receives an 
annuity, and annuities are paid to children until they 
attain the age of sixteen years. The total of such annui- 
ties must not exceed 60 per cent of the previous annual 
earnings of the deceased workman calculated as above. 
Burial expenses are also paid up to one-fifteenth of the 
annual earnings, with a minimum allowance of 50 
marks ($11.90). In certain cases, a lump sum is paid 
on the death of a workman instead of annuities to his 
dependents. The Federal Council may extend the oper- 
ation of the Accident Insurance Law to certain occupa- 
tional diseases. Disputed claims are settled by insur- 



420 ECONOMICS 

ance arbitration courts. Compulsory accident associ- 
ations, composed of accident associations to which em- 
ployers must belong, are empowered to formulate regula- 
tions for the prevention of accidents and to impose fines 
upon the employers and upon workmen who infringe 
these regulations. 

374. German system not financed by State. — The 
German system is thus not a system of State accident in- 
surance in the strict sense ; it is controlled by the State, 
but the funds remain in the hands of the accident and sick 
associations. The sick associations were in existence 
before the accident insurance law was passed. It is very 
difficult to compare the costs and the results of the Ger- 
man system with those of other systems, for that and 
other reasons. The accident insurance funds do not 
stand by themselves. For the first four weeks of dis- 
ability the compensation is paid exclusively from the 
sick funds, and for the next nine weeks it is partly paid 
by these funds. In the early years of the operation of 
the German system there was much malingering or 
fraudulent application for sick and accident relief, in 
spite of the expectations that the intimate relations with 
one another of the members of the sick funds would 
result in the prevention of fraud. It is understood that 
this feature has been to some extent diminished by care- 
ful medical superintendence. In the German system, 
accident insurance is also aided by the police and by the 
postal departments, and the costs of these services do not 
appear separately in the accounts. 

The success of the German accident insurance law may 
perhaps be referred partly to the fact that the law was 
not applied to an already highly developed industrial 
system, but that it grew up with it, and partly to the 
fact that the highly regulative character of the German 



SOCIAL LEGISLATION 421 

administration to which the people are habituated has 
enabled the government to force employers and employed 
alike into associations controlled by the State. The 
great commercial prosperity which Germany has en- 
joyed during the period in which the insurance legisla- 
tion has been in force has facilitated the bearing of the 
burden of accident and old-age pension funds alike. 
The employers have, however, been complaining of the 
great increase in the cost of social legislation and the 
pressure of it upon certain industries. 

375. Workmens Compensation Act in England. — 
The Workmen's Compensation Act is of a different 
type. It applies to accidents in all employments and 
to twenty-four occupational diseases (this number may 
be added to by the Home Secretary). The Act pro- 
vides for compensation for injuries by accident arising 
out of and in course of employment which prevent a 
workman from earning full wages for one week or more, 
or which cause his death. In case of wilful misconduct, 
resulting in partial disablement, no compensation is 
paid, but if the workman is permanently disabled or 
killed, compensation is payable. All manual laborers 
and any regularly employed person whose wages are 
less than £250 ($1,216.63) per annum comes under the 
operation of the Act. The benefits are as follows: for 
partial disability, there is a weekly payment during life 
not exceeding that loss in earning power, beginning one 
week after disablement; for permanent total disability, 
a weekly payment after the first week of not more than 
one-half of the average weekly earnings, but not more 
than £l ($4.87) payable during life; for temporary dis- 
ability; and for death, a sum equal to three yeai-s' earn- 
ings. If the amount is less than between £150 to £300 
($729.98 to $1,459.95) the compensation is given to 



422 ECONOMICS 

wholly dependent persons, the amounts payable to par- 
tial dependents are settled by arbitration and all sums 
are to be invested hj order of the county court. Burial 
expenses to the amount of £10 ($48.70) , including med- 
ical attendance, are provided for. Free medical attend- 
ance is given only in cases of death. The entire cost of 
the compensation rests on the employer, who may insure 
against his liabihty in any certified insurance scheme. 
There are special provisions for the payment of com- 
pensation in case of the bankruptcy of the employer. 
Disputes arising under the Act are settled by arbitration 
or by the county court, and not by a specially established 
tribunal. 

The English system is thus a system in which the cost 
of compensation falls directly upon the employer, who 
may, if he chooses, insure against the liability. Insur- 
ance is, however, not compulsory, nor are the employers 
grouped together as under the German system. The 
prevention of accidents, being in the hands of the Fac- 
tory Inspectorship, is not mingled with the compensa- 
tion scheme, as it is in Germany. 

376. Federal compensation for accident in the United 
States. — A Federal act was passed by the Congress of 
the United States in 1908 providing for compensation 
for accidental injuries sustained by employees of the gov- 
ernment. This special act is by no means so liberal in its 
benefits as either the German or the English general 
acts. The "waiting time," or the time which must 
elapse after the accident until benefit begins to accrue, 
is fifteen days, against the German three days and the 
English seven. The amount of compensation for death 
is only one year's wages, and that is subject to deduction 
of the amount paid in the current year up till the time 
of death. No burial expenses are allowed. In case 



SOCIAL LEGISLATION 423 

of disability, one year's wages only are paid, whether 
the disability is total or partial, temporary or permanent. 
In case of dispute, there is no appeal. The measures 
adopted by the various states or projected by them can- 
not be detailed here. Some of them, notably the State 
of Washington, have adopted the German system with 
modifications. 

377. Question of responsibility. — The questions of 
economic interest arising out of this form of social legis- 
lation are mainly these; first, the relative advantage of 
individual and of collective responsibility; second, as- 
sumption of the cost ; third, the economic effect. 

Individual resj)onsibility, which is the feature of the 
English system, appears, on the whole, the system most 
likely to result in the prevention of accidents by em- 
ployers and by workmen alike. The employer has to 
pay compensation and the workman has to suffer the 
loss of a week's pay for any accident. In the English 
system, the whole scheme is aided by a highly efficient 
factory inspection by qualified inspectors. The em- 
ployer who is individually responsible may insure his 
risk under conditions which enable him to do so at a 
minimum cost for such risks. He can, if he chooses, 
pay his premiums to a mutual insurance company com- 
posed of all employers in a district or in a country, or 
he can do so to a company whose risks are international. 
The larger the total area of risk, the smaller is likely 
to be the cost of the individual risk. 

Collective responsibility under the German system 
involves compulsory mutual insurance in relatively small 
groups, and mutual inspection within these groups. If 
the groups are very small, the burden of the accidents 
may be very great and the careful employer is burdened 
to the same, or even to a greater, relative extent than 



424 ECONOMICS 

the careless employer. If, for example, an employer 
succeeded in altogether preventing accidents in his works 
by the installation of certain machinery and by close 
supervision, under the system of individual responsibil- 
ity his risk would be nil; but under the collective sys- 
tem he would still be responsible for compensation for 
accidents in the works of his less careful fellow employ- 
ers. The careful employer might thus have a high in- 
surance rate to pay in addition to the cost of the measures 
by means of which he had eliminated accidents in his 
own establishment. 

The disadvantage of the system of individual respon- 
sibility is that in cases of pensions given by way of com- 
pensation (a point to be considered later) , the individual 
employer cannot be regarded as being able always to 
offer undoubted security for the continuance of the pay- 
ment of the pensions, since he cannot be compelled to 
continue to carry on his business against his will. This 
difficulty might, of course, be avoided, as it is avoided 
in the English system, by the payment of a lump sum 
by the employer, which sum is invested by the order of 
a court. In the case of large and stable enterprises, such 
a difficulty need not arise. The cardinal objection to 
the mutual system, as applied to small groups, is that 
the area of each is too small to permit of economical 
insurance. 

The system of collective responsibility in groups in- 
volves either the collection of premiums in excess of the 
amount of the annual sum expended in compensation, 
for the purpose of providing a reserve against the future 
payments arising out of accidents of the year, or the 
collection of assessments coinciding precisely with the 
amount required within the year, to discharge the cur- 
rent obligations of the group. 



SOCIAL LEGISLATION 425 

378. Individual mid collective responsibility com- 
pared. — The advantage of the first method is that if the 
premiums are based upon proper actuarial calculations, 
the funds collected each year will bear the whole of the 
burden of the accidents of the year. A portion of the 
funds remains in hand because full payment by way of 
compensation or in pensions has not yet matured. 

The advantage of the second, or assessment method, 
is that nothing is taken from the contributors to the in- 
come for compensation, except what is necessary for the 
annual payment, while the employers can retain, for the 
use of their business, the funds which represent the dif- 
ference between their actual payments and the amount 
which would have been necessary to extinguish all future 
payments on account of the accidents of the year. 

In the first case there are funds to manage and invest, 
and in the second case no funds are accumulated. The 
disadvantages in the first case are that the contributors 
are obliged to supply funds long before they are actually 
required and that accumulation involves expense of man- 
agement and risk of loss. The disadvantages of the 
second method are that the assessments gradually in- 
crease as the cumulative effect of the granting of addi- 
tional pensions annually makes itself felt, and that 
changes in the personnel of the group might relieve those 
who gave up business and left the group of part of their 
obligations, while newcomers would be called upon to 
pay compensations for accidents v/hich occurred before 
they began business. 

An assessment system in a mobile group might thus 
result in insolvency of the fund. Accumulated obliga- 
tions in respect to long past accidents might eventually 
prove ruinous, so that either the deficits would have to be 
met by the State or the scheme would have to be aban- 



426 ECONOMICS 

doned. A scheme based upon assessments levied on in- 
dustrial groups on the ground that the industry in which 
an accident occurs ought to bear the burden of compensa- 
tion, thus seems likely to drift, in the first instance, into a 
scheme in which all industries bear the burden out of a 
common fund and, later, into one in which the whole 
of the burden is thrown directly upon the general tax- 
payer. Unless such a system were supplemented by a 
very rigid factory inspection, the industrial accidents 
might become much more frequent than would be the 
case under almost any other system. 

379. AssumiJtion of costs. — In the German system the 
main cost of compensation is divided between the em- 
ployer and the workman, the State bearing only a part of 
the cost of administration. The contributions are levied 
directly upon the workmen and the employer respect- 
ively. In order that the employers may have more in- 
fluence in the distribution of the benefits of the sick 
associations, they have even asked that they be permitted 
to contribute more than the law originally provided for. 
In the English system, the whole of the cost is borne 
directly by the employer and this method also is recom- 
mended in several of the projects which have been 
brought forward in the United States and Canada. In 
the report upon Workmen's Compensation by Sir Wm. 
R. Meredith to the Ontario Government, the advisa- 
bility of this is strongly urged. On the other hand, the 
Canadian Manufacturers' Association has suggested 
that the workmen contribute. 

The important question is not, however, upon whom 
the cost is imposed directly, but by whom the cost must 
be borne eventually. It has been argued that if the cost 
is thrown upon the employer, and if he is unwilling or 
imable to bear it, he will be able to add it to the price of 



SOCIAL LEGISLATION 427 

his product. If he could do this the customer would have 
to bear the burden. If we regard the cost of comx^ensa- 
tion for accidents as a tax and apply to it the principles 
of forward and backward shifting which we have already 
examined in an atmosphere of perfect competition/ the 
consumer would have to bear the cost, either in the in- 
crease of the price or in the absence of a reduction when 
a reduction would have taken place. 

If the employers are in the position of monopolists 
and are obtaining a rack price, then it is clear that they 
must pay the compensation out of their profits from 
this rack price. But if the competition is such that the 
price cannot be increased and that the employers are 
obtaining only a marginal profit, while the workmen 
are receiving wages in excess of their minimum subsist- 
ence, the cost of the insurance will fall upon them in 
the form of reduced wages or in the form of the absence 
of an increase, which would otherwise have taken place. 

It should be observed, however, that very small costs 
remain in general where they are first imposed, and that 
if the cost of insurance is inconsiderable its direct impo- 
sition upon the employer v/ould not necessarily result 
in its being shifted either to the consumer or to the 
workman. 

If an attempt is to be made to impose the burden of 
compensation for accidents upon the industry, from the 
administrative point of view, it is undoubtedly less costly 
to impose it upon the employer than to impose it directly 
upon the workman, owing to the greater cost of collec- 
tion in the latter case. Since the workman is usually in 
a weaker economic position than his employer, it is likely 
that, in the normal case, all burdens such as the cost of 
compensation, while levied directly upon his employer, 

1 See Page (187). 



428 ECONOMICS 

will, at least during certain periods, eventually fall upon 
him. For this reason it has been advocated that all such 
burdens should be borne b}^ the state; that is, by the 
general tax fund, but the ulterior result of such an ar- 
rangement might involve not only a greater amount of 
malingering than presently exists, but a larger number 
of accidents. 

S80. Economic effects of worhmens compensation 
systems. — Experience has shown that when a new sys- 
tem is established in response to philanthropic agitation, 
there is a disposition on the part, not only of those for 
whose benefit it was intended, but of others, to take ad- 
vantage of it and that there is thus a possibility of even 
a soundly based scheme being compromised at the out- 
set. This is peculiarly true of all schemes which are 
organized or aided by the state. 

The experience of the English Act immediately after 
its coming into force showed that the duration of sick- 
ness of workmen regulated itself according to the act. 
Since the act required a workman to be sick for seven 
days before he could receive sick allowance, the period 
of sickness began to lengthen. In one mutual society 
operating under the Act, during the six months prior 
to its operation, 1.9 per cent of workmen under its pro- 
visions suffered from illnesses lasting between seven and 
fourteen days, while 3.5 per cent suffered illness lasting- 
longer than fourteen days. In the first six months of 
the operation of the act, 7.4 per cent of the workmen 
had illnesses lasting the shorter period and 6.9 per cent 
had illnesses lasting for longer periods. In other words, 
the claims for compensation fully doubled in number. 
From the point of view of production, a lax administra- 
tion of a workmen's compensation act must be disadvan- 
tageous. 



SOCIAL LEGISLATION 429 

381. Old-age pensions. — Closely connected with the 
topic of sickness insurance is that of old-age pensions. 
The payment of annuities to persons who have contrib- 
uted to funds, established for the purpose of giving an- 
nuities to the survivors or attaining a certain age, is not 
new. This method was practiced by the medieval 
guilds and by their successors, the Liveried Companies, 
Incorporated Trades and the Friendly Societies prob- 
ably during the whole period of the existence of these 
bodies. Such a practice, widespread as it was, and sup- 
plemented as it was in the early ages by benefactions of 
the pious, in later ages by the Poor Law and throughout 
by domestic pensions, appeared to render more ambitious 
state schemes unnecessary. Schemes involving the 
granting by the State of pensions on the ground of age 
were, however, frequently advanced from the end of 
the seventeenth century onwards. So far as the writer 
is aware, the earliest of these schemes were all advanced 
in England; it was not until 1889 that the German Old- 
Age and Invalidity Insurance Law was passed. 

382. History of pension acts. — The earliest Eng- 
lish schemes were Daniel Defoe's public and com- 
pulsory scheme of 1692 or 1693 (published in his Essay 
upon Projects in 1697) ; and Dowdeswell's Bill of 1773. 
This bill passed the House of Commons, but was thrown 
out by the Lords. It received the support of Edmund 
Burke. 

Both of these schemes involved contributions by those 
who might afterwards, if they survived, become benefi- 
ciaries. Defoe's scheme was compulsory, Dowdeswell's 
involved payment of deficiencies out of the rates. 

Bolle's Bill (1787) provided for payments into a fund 
by rich and poor alike ; the poor alone receiving from the 
fund benefits for accident, misfortune or old age. 



430 ECONOMICS 

Thomas Paine, in his "Agrarian justice" (1795-96), de- 
velops a plan for a National Fund, raised by means of 
heavy succession duties, out of which there was to be 
paid to every person attaining the age of twenty-one 
years, £15 by way of compensation for the loss of natu- 
ral inheritance through the introduction of the system 
of landed property, and on attaining the age of fifty 
£10 per annum during life, Lansdowne's Bill (1837) 
proposed to add from local funds 25 per cent to the 
amounts contributed by the members of Friendly Socie- 
ties. Corrance's project (1869) also involved assist- 
ance to Friendly Societies by the State in order to enable 
them to provide pensions to other members on attaining 
the age of sixty or sixty-five. 

Canon Blackley proposed in 1879 a comprehensive 
scheme of state pensions for the aged. This scheme was 
followed immediately by that of Mr. Rankin, and in 1889 
by that of Mr. Ede. In the same year the German Old- 
Age and Invalidity Law was passed. 

The provisions of this law were very similar to those 
of Canon Blackley's scheme of 1879. Several projects 
for old-age pension funds were advanced after the adop- 
tion of the plan by Germany and in England several 
Commission Acts on the question (1893, 1895, 1898, 
1899, 1900, 1903). 

Eventually an Old- Age Pension Act granting pen- 
sions without previous contributions was passed in 1908. 
An Old- Age Pension Act was passed by New Zealand 
in 1898, by New South Wales in 1900, and by Vic- 
toria and Queensland later. The Commonwealth of 
Australia adopted a uniform pension law in 1908. In 
the United States there are numerous partial systems 
for pensioning certain classes of persons under Federal 
and under state laws, but there is no general law. 



SOCIAL LEGISLATION 431 

383. Ccmadian situation. — In Canada there is no gen- 
eral pension law. In January, 1912, a Select Special 
Committee was appointed by the government for the 
purpose of hearing evidence and making a report. The 
number of persons to whom an old-age pension system 
would apply would depend, (a) upon the age at which 
the pension is given, and (b) upon the classes of persons 
to whom it is to be given. 

The results of an old-age pension scheme, which 
placed the pension age at sixty-five years and which 
gave a pension of $1 per week to those persons who, 
having reached that age, were unable to maintain them- 
selves wholly from their own means, may be put pro- 
visionally as follows. The total number of persons of 
sixty-five years and upwards in the population of Can- 
ada is about 5 per cent of that population; if one-fifth 
of these were unable to maintain themselves and were, on 
that ground, granted the pension named, the cost at the 
present time would be $3,750,000 per year. In a country 
like Canada, where there is no poor law, it may be 
that an old-age person fund may become necessary. 
Whether its cost should be sustained wholly from the 
general revene of the State or whether a tax for the pur- 
pose should be imposed, is a question which would have 
to be determined by the conditions of the time and the 
intenton of the fund. 

384. Labor eocclianges. — Labor exchanges or employ- 
ment offices, conducted by or controlled by the govern- 
ment, have been established during recent years by sev- 
eral countries on the continent of Europe and by Great 
'Britain. Persons seeking relief on account of unem- 
ployment are required to register in these exchanges. 
To them, also, employers are expected to refer when 
thev want workers. 



432 ECONOMICS 

Government exchanges were established as a part of 
the general scheme of dealing with the question of unem- 
ployment and also to provide an alternative to the pri- 
vate bureaus of the same kind which had led to serious 
evils, to excessive commissions and to cases of fraud. 
The labor exchange has, on the whole, been shown to be 
a great benefit. It has aided in the separation of the 
chronically unemploj^ed from the unemployed workmen 
who really desire employment, and it has prepared the 
way for dealing with the former class by other methods. 

385. A new experiment. — Steps have been taken in 
Great Britain, in connection with the labor exchanges 
supplemented by boards appointed partly by the gov- 
ernment and partly by educational and similar institu- 
tions, towards finding suitable employment for boys and 
girls immediately when they leave school. This interest- 
ing experiment in paternal legislation has not been in 
force for a sufficient length of time to enable any but 
very provisional conclusions to be arrived at. However, 
the period during which it has been in operation has been 
a period of great activity in industry, during which the 
need for assistance in finding employment has not been 
so great as it would be in an industrial crisis. 

The experiment, however, suggests certain difficulties. 
If a boy, for example, applies to the board, or if his 
parents apply for him, even if the board is at once able 
to provide employment, to what kind of employment is 
the boy to be put? His record at school affords only 
certain indications, and it may be used so far as it avails, 
but even with this record before it, how is a board to 
decide a matter which must have been difficult for the 
parents to decide (otherwise they would not have made 
the application) ? 

So far as the experiment has gone, there seems to be 



SOCIAL LEGISLATION 433 

a tendency on the part of the board to solve the question 
by recommending the boy to adopt the trade of his 
father and to find him a position in that trade as an ap- 
prentice if apprenticeship is usual. The board can, in- 
deed, indirectly exercise some compulsion, for, if a boy 
who has been dealt with by the board and has been sent 
to an employment selected by it, is found begging in the 
streets, having left this employment of his own accord, 
he may be sent back to his employment as an alternative 
to being sent to jail, or to an institution for vagrant boys. 

It is obvious that a measure of this kind very nearly 
involves compulsory labor, and if the practice of send- 
ing a boy into his father's trade is followed, it must lead, 
so far as it is effective, to the perpetuation of hereditary 
tradesmanship. It is quite true that industrial castes are 
already very common, and that the majority of youths 
follow the trade of their fathers ; but, until now, this has 
been a voluntary and not a compulsory practice. 

386. "Right to xvorh" — In the institution of labor 
bureaus and in the adoption of other methods of dealing 
with unemployment, governments have endeavored to 
make it clear that the modern state does not admit the 
right to work. The admission of the " right to work " 
would involve the duty on the part of the State to find 
employment for all applicants. That governments have 
refrained from admitting the right and the duty is not 
of serious importance, although the intention of legisla- 
tion with respect to employment is that everyone who 
can work will obtain an opportunity of doing so irre- 
spective of the state of industry. If it does not achieve 
this result under circumstances of exceptional pressure, it 
is clear that supplementary legislation must follow. 

In the United States and Canada the central govern- 
ments have not been endowed by their respective legisla- 

C— I— 28 



434 ECONOMICS 

tures with powers to deal with unemployment. The rea- 
son for this lies in the fact that although employment 
fluctuates in both countries, the number of unemployed 
in industrial crises of the past has not been in excess of 
the local means of dealing with the problem, either by 
municipal measures or by measures of private charity. 
As the conditions in America approximate European 
conditions, unemployment legislation, as also other 
forms of social legislation not now obviously necessary, 
may become so. 

387. Unemployment. — The medieval system of ob- 
ligatory labor and corresponding obligations on the part 
of the masters of the laborers has already been described. 
In theory each man had his place in medieval society, but 
he was obliged to remain in that place, though practice 
did not always conform to the theory. Obligations were 
evaded on both sides. Cynical injustice and excessive 
cruelty often made hard the life of the medieval culti- 
vator. 

Above all there was no freedom of movement, unless 
everything was abandoned by flight. The modern sys- 
tem has given mobility, but many of the compensations 
of medievalism have disappeared. The legal right to a 
definite place in a social group is no longer recognized, 
and unless a man can gain a footing by some means he 
finds himself in the same position as an outlaw with the 
difference that the outlawry is not always due to his 
own act. 

All governments are reluctant to encounter the diffi- 
culties which would ensue upon the recognition by the 
State of the right to employment, but in all countries 
there exist more or less effective measures for dealing 
with unemployment. 

The chief point of interest during recent years has 



SOCIAL LEGISLATION 435 

been the sj'^stematic attempt to differentiate the occasion- 
ally unemployed from the chronically unemployed. The 
former class has been dealt with in Germany by means 
of labor colonies and in Holland to a small extent by 
labor colonies, but more especially by municipal relief- 
works. The latter class has been, in effect, forced into 
j)auperism properly so-called, and has been prevented 
from encroaching upon the means of relief provided for 
workmen who are habitually employed, but who, occa- 
sionally, are obliged to seek relief because they are out 
of employment from sickness, depression of trade or 
other like causes. 

388. Insurance against unemployment. — Insurance 
against unemployment has been the common practice of 
trade unions and some friendly societies ; it has begun to 
be regarded as one of the functions of the State. It is 
clear that the strain upon any state system must come 
during a long period of depression of trade or during an 
epidemic of strikes. 



CHAPTEK VII 

SOCIALISM 

389. Origin and history of socialism. — Socialism may 
be provisionally defined as a group of ideas, partly of 
an economical and partly of an ethical character, con- 
cerning the future of society. These ideas, the more 
general aspects of which will appear from the following 
pages, have been promulgated and held by some who 
have regarded them as embodying a new science of 
society and by others, with so much passionate devotion, 
that the group of ideas is frequently regarded by them 
as a religion. 

The historical origin of what is usually called mod- 
ern socialism may be attributed to the combined effect 
of the ideas of political freedom whose development 
was the characteristic of the eighteenth century, and the 
development of the large industry which was character- 
istic of the first half of the nineteenth century. On its 
literary side, socialism owed its origin to the almost 
contemporaneous writing of two groups; one in Eng- 
land and Ireland, represented by the cotton manufac- 
turer, Robert Owen, and by the Irish gentleman, Will- 
iam Thompson, who was inspired by Jeremy Bentham, 
whose destructive criticism of English law brought 
about its revision ; and the other group in Paris, consist- 
ing of Saint- Simon (whose Nouveau Christianisme in- 
spired the social views of Carlyle and Ruskin ; Fourier, 

436 



i 



SOCIALISM 437 

(whose influence upon French political and economic 
thought was greatest between 1845 and 1850 and be- 
tween 1865 and 1870) ; Proudhon, who was the father 
of modern anarchism ; and Considerant, whose role was 
rather that of chronicler than of originator. 

The socialism of 1830 was vague and varied, but it 
contained the germs of most of the subsequent ideas on 
the subject. It should be realized that from the middle 
of the eighteenth century great stress had been laid 
upon the effects of surroundings upon individual char- 
acter. The growth of factory industry together with 
the growth of the towns in which that industry was con- 
ducted produced conditions which made deterioration 
obvious and inevitable. The movement for sanitation 
which began actively about 1830, the movement for 
national education v/hich began about the same time but 
which did not come to fruition until the seventies of the 
nineteenth century, the movement for Parliamentary 
Reform which came to fruition in 1832, the movement 
for free importation of wheat by repeal of the Corn 
Laws, all absorbed a large part of the energies of the 
practical ref orm.ers of that time. These movements had 
their beginnings in England, but they were reflected 
either positively or negatively in other countries and 
they were associated in more detached minds than those 
who were actually engaged in them with the funda- 
mental studies in social history and social organization 
by which the subsequent period was distinguished. 

These studies involved the examination of the growth 
of communities from an historical and legal point of 
view, and thus the doctrine of the State, which had been 
reduced to a formula in the seventeenth and eighteenth 
centuries, came to be revised. The revision resulted in 
the more or less settled conviction that the State was es- 



438 ECONOMICS 

sentially, not merely a political mechanism by means of 
which sundry political ends might be served, but that it 
was related also to the old idea of a community in the 
respect that it was the organ of a group of persons 
wliose mutual interests bound them together, the essence 
of this unity being the mutuality of the social relations. 

The community thus appeared as a spontaneous so- 
cial organization the end of which was the interest of its 
members in all senses, and the state appeared as the 
indissociable organ of this community by means of 
which the various ends of the community might be 
served. The state came to be no longer represented 
characteristically by a policeman, a soldier and a judge, 
but rather by the medical officer of health, the post- 
master and the fireman. In other words, emphasis 
came to be laid rather upon the helpful functions of the 
State than upon its purely repressive and regulative 
functions. The former conception of the state as a 
merely negative regulator has, in effect, passed away, 
and the criticisms upon the state which were based upon 
that conception, in so far as that conception has decayed, 
have come to be no longer applicable. 

390. Progress a result of circumstances. — The vari- 
ous stages in the process have not, however, been accom- 
plished to any material extent through the pressure of 
propaganda, but rather through the pressure of circum- 
stances. Indeed, the propagandists were often the last 
to realize that an important step toward their ideal State 
had already been made, and they were apt to display 
indifference to such steps and even sometimes to resist 
them. The German socialists, for example, were at the 
beginning either indifferent or hostile to the state insur- 
ance policy of Bismarck. It was only after it had been 
in operation for a number of years that they were pre- 



SOCIALISM 439 

pared to acknowledge that it formed a step toward at 
least some of their own aims. 

It must not be supposed that this great change in the 
doctrine and in the practice of the state is necessarily an 
indication of social progress in the large sense. Certain 
counter disadvantages may probably be set against the 
advantage which the change has implied. The greater 
care for the individual which the state appears to have 
manifested may be accompanied by less care by the 
individual for himself. The state is trusted to such an 
extent that the individual may have become heedless and 
indifferent to personal responsibility. Some observers 
have noticed, even in new countries, a lack of initiative 
which they attribute to the subtle influences of the as- 
sumption of wide powers by the state. There is prob- 
ably a net balance of advantage when all such adverse 
incidents are taken into account. It cannot be sup- 
posed that the process of development is at an end, nor 
can it be predicted how long the present phase may last. 

Having sketched roughly some of the incidents of 
social progress, let us ask specifically what is the rela- 
tion of socialism to that progress. 

Socialism may be considered as a series of doctrines 
relating to social progress. These doctrines cannot be 
fully developed here; only the outlines of them can be 
given. Special treatises should be consulted upon each 
of them. 

391. Classification of socialist doctrines, — Irrespec- 
tive of the historical order of their development, these 
doctrines may be summarily classified as follows : 

(a.) Those which are based upon the doctrine that 

labor is the source of all value, and that, therefore, 

the laborer has the "right" to the whole of the 

produce. 



440 ECONOMICS 

(b.) Those which are based upon denial of any 
"rights" of individual property, regarding the com- 
munity as the sole custodian of the "rights." 

(c.) Those which are based upon the view of his- 
tory which regards it as chiefly a record of the 
struggle of classes, the earlier struggle having been 
conducted against the aristocracy by the middle class 
— the class intermediate between the large owner of 
property and the owners of no property or the prole- 
tariat — the later struggle being between the middle 
class and the proletariat. Acording to this doctrine 
the middle class has now attained political preponder- 
ance in all countries by wresting it from the land- 
owning class. What is called democracy is thus really 
the rule of the middle class. According to this doc- 
trine, also the struggle for political and economic 
power, which is now going on, is between the prole- 
tariat or non-propertied class and the middle class. 
Those who entertain this view lay great stress upon 
the inevitability of political evolution, and they regard 
the victory of the proletariat as quite certain, the 
period of the victory alone being undiscoverable. 

(d.) Those which are based upon the idea that by 
means of the spreading of education, and of the 
steady application of legislation as well as by means 
of voluntary agencies of many kinds, the principles 
of brotherhood and altruism or self-regardlessness 
will become so dominant that there will arrive a 
society in which the only competition will be competi- 
tion in well-doing. 

(e.) Those which are confined to the idea that the 
nation should possess and retain under its own ad- 
ministration all the means of production and that 
every one being offered equally an opportunity to 



SOCIALISM 441 

work, the existing inequalities of well-being would 
largely disappear. 

(f.) Those which, while based upon the views un- 
der headings (a) and (c) involve "direct action" 
to attain the desired ends, instead of waiting for 
what appears to be the slow process of social evo- 
lution. 

(g.) Those which are based upon the idea that the 
modern organized State, no matter under whose con- 
trol it may act, either nominally or really, is an engine 
which is always used against the non-propertied 
classes and in favor of the well-to-do. Under this 
doctrine, the State should be abolished altogether, na- 
tional boundaries should be obliterated, and men left 
to group themselves spontaneously into such groups 
as they might determine, the essential condition being 
that no support by law or force should be given to 
those who exploit the labor of others. 
392. Eccplanation of socialist doctrines. — It is better 
to associate the complex expression "socialism" with 
these different and even contradictory views than to 
affix to each of them a label which may be taken instead 
of the description, and which, therefore, may readily be 
misunderstood. For the sake, however, of those who 
are disposed to make further inquiry into the subject, 
which is one of the most important of modern times, the 
following may be found to be useful : 

(a.) The doctrine that labor is the sole source of 
value is derived from a too literal rendering of Adam 
Smith's theory of labor as one of the determinants of 
value. The view was put forcibly by William 
Thompson in his "Labor Reward" and by others, es- 
pecially by Karl Marx, who probably derived the sug- 



442 ECONOMICS 

gestion from Thompson, although he worked out the 
doctrine in greater detail/ 

(b.) This doctrine is popularly known as commun- 
ism. Its chief advocates of it in modern times have 
been Proudhon and Prince Kropotkin. The best 
statement of the doctrine is to be found in the numer- 
ous pamphlets of the latter. 

(c.) The materialistic view of history was stated 
by Montesquieu, but it was fully developed and con- 
nected with the view of the class struggle by Karl 
Marx who, indeed, seems to have regarded himself 
as the originator of both these views. Statements of 
them will be found in his works. 

(d.) This is the view of large groups in Europe 
and America who are customarily described as Chris- 
tian Socialists ; similar views are held in Germany and 
France by academic socialists. 

(e.) Many who call themselves socialists, or more 
accurately collectivists, hold the views described under 
this head. They are not interested in the class 
struggle and would, indeed, regard with complacency 
a collectivist state in which the dominant political 
class would consist of those annuitants who had sur- 
rendered their enterprises to the state in return for 
perpetual annuities. 

(f.) "Direct action" is advocated as a policy by the 
syndicalists who regard the workers as the only right- 
ful possessors of the means of production and who 
suggest that factories, mines, etc., should be taken in 
detail, by force if necessary. If they cannot be taken, 
they may be destroyed in order to bring the capitalist 
system to an empasse. 

*In connection with this doctrine Marx's "Capital" should be read, although 
it is a difficult book for any but an ardent student, with some preparation in logic 
and in the history of economic theory. 



SOCIALISM 443 

(g.) The doctrine of Anarchism was formulated 
by Produhon and developed by Bakuin, a Russian 
proprietor who became involved in revolutionary 
movements in- Germany and in Italy. His ideas rep- 
resent a reaction against not merely an autocratic 
state, but against autocracy in any movement. He 
resented, for example, the autocratic element of which 
Karl Marx was the chief exponent in the Interna- 
tional Working Men's Association, and he objected 
to collectivism on the grounds that it involved the ex- 
ploitation of the private individual by the State, and 
that such exploitation was not less injurious than the 
exploitation of individuals by one another. 
It may be remarked that, while these various forms of 
the group of doctrines which have acquired the generic 
name of socialism, vary widely from one another, they 
have one essential point in common. They all rest upon 
the assumption that human nature is not merely sus- 
ceptible of improvement, but is susceptible of perfection. 
This assumption became widely prevalent in the discus- 
sions on social progress in the eighteenth century, and it 
has ever since been a latent or explicit assumption in all 
socialistic doctrines. Discussion of the validity of this 
assumption is beyond our field. 

393. Various methods. — Apart from the doctrine of 
socialism, there are the methods by means of which a 
given system may be brought into existence. Some of 
these are invalved in the statement of the doctrines — 
Syndicalism, for example, is really a method rather than 
a doctrine — but some of the doctrines may be associated 
either with one method or another. 

For example, the collectivism or state socialism of 
Marx, indicated under the headings (a) and (c) in the 
above outline, may be attempted by peaceful and grad- 



444 ECONOMICS 

ual means or it may be attempted by violent revolution- 
ary means with a view to its immediate establishment. 
Marx was not oblivious to the fact that the organization 
of a single socialist state in his sense, while all others 
remained in the capitalist phase, would be an affair of 
great difficulty, and he, therefore, urged the need of 
an international movement in order that all of the in- 
dustrial nations should be brought to the point of adopt- 
ing state socialism simultaneously. His watchword, 
therefore, was, "Wage workers of all nations, unite!" 

While small international groups have been formed 
from time to time, and while attempts have been made 
to turn international peace movements into directions 
favorable to international organization of labor, these 
attempts have not been conspicuously successful. In- 
deed, the socialist parties in Germany and France are 
strongly national. Their members are Germans and 
Frenchmen first and socialists afterwards. Interna- 
tional socialist congresses notwithstanding, international 
socialism does not seem to have increased in force during 
the past forty years. 

The present position of revolutionary socialism, in 
the sense of Marxists' collectivism, may be put briefly 
thus. There is, to begin with, the party of devout 
Marxists for whom "Capital" is a sacred book, and who 
read the writings of Marx in a dogmatic and uncritical 
spirit. Then there are the Revisionists or Marxists, 
who, in general, believe the a^edo of Marxism, but who 
are disposed to make critical emendations. They are 
not convinced, for example, that Marx's doctrine that 
every nation must pass through these phases, the agri- 
cultural, the capitalist industrial, and the socialist in- 
dustrial, is valid under all circumstances. The disputes 
between these two parties in the Marxist camp have 



SOCIALISM 445 

for some years occupied their minds in recondite and 
sometimes futile discussions, and they have paralyzed 
their energies. The success of syndicalism may be at- 
tributed largely to that fact. 

The Syndicalists offered something immediate while 
the Marxist paradise seemed to be always becoming more 
vague and more distant. The concessions made by 
nearly all the modern governments have also militated 
seriously against the socialist propaganda as also have 
advances of wages and general briskness of employment. 
When business and wages decline, there is then offered 
"rich material for agitation." The socialist movement 
in America has followed the course of the socialist move- 
ment in Europe and the same parties have developed. 
Here, again, the disputes between orthodox Marxists 
and the Revisionists or other newer groups have par- 
alyzed their activities. Yet, it may perhaps fairly be 
said that by far the larger number of recent foreign 
immigrants belong to one or another of the sociahst 
groups, and that any industrial disturbance might sud- 
denly reveal a formidable latent force in the socialist 
idea, however critically its phases may be viewed. 

394. Significance of the movement. — In general, it 
must be allowed that socialism has done much to in- 
tellectualize the workingman. The reader even of the 
popular socialist tracts must be an intelligent man; and 
the reader of Marx must possess ability much above the 
average. Constant assertion of the class struggle and in- 
sistence upon "class consciousness" has had the effect of 
bringing many workingmen to the position that know- 
ledge cannot be permitted to become the exclusive prop- 
erty of well-to-do people, and, sometimes laboring under 
great disadvantages, they have set themselves to under- 
stand the difficult questions in which the relations of 



446 ECONOMICS 

capital and labor are involved. It is very clear that 
those who have the administration of labor must be, 
at least, as well informed. 



QUIZ QUESTIONS 

(The numbers refer to the numbered sections in the 

text) 

PART I: PRODUCTION 
CHAPTER I 

1. What is the science of economics? 

2. Discuss the social aspect of economics. 

3. Why is the study of economics important to the 
business man? 

4. What is the economic side of governmental ac- 
tivities ? 

5. Why are the processes of production and consump- 
tion likely to be underestimated in individualistic indus- 
trial societies? 

6. Illustrate the indispensable and contingent condi- 
tions of organized production. 

7. Why is it necessary to emphasize the social point 
of view in relation to the economic processes ? How does 
social instability affect the economic processes? 

8. What is the purpose of the economic processes? 

9. What is meant by the "national dividend"? 

10. In what way does unproductive consumption di- 
minish the "national dividend"? 

447 



448 ECONOMICS 

CHAPTER II 

11. Define Production. 

12. Of what importance is the system of production 
to the nation as a whole? 

13. What are the characteristics of simple production? 
Illustrate. 

14. What are the requisites of simple production? 
Why is it sometimes necessary to restrict access to raw 
materials ? 

15. Discuss the division of labor in simple production. 

16. What are the characteristics of complex produc- 
tion? What is the function of the instrument? 

17. What requisites appear in complex production 
that are not present in simple production? 

18. Is it possible to determine the owner of the fin- 
ished product? If so, how? 

CHAPTEK III 

19. Why is it that ideal economic justice is unattain- 
able? 

20. Would it be just to allocate the whole of the prod- 
uct to labor? If not, why? 

21. What are the factors of complex production? 
Why is each of them necessary? 

22. What is meant by fixed and by circulating capi- 
tal? 

23. What are the sources of capital? 

24. Describe the functions of each of the contrib- 
utories to production. 

25. Give an account of the law of increasing re- 
turns. 



QUIZ QUESTIONS 449 

26. What are the checks upon the operation of this 
law? Has the law of increasing returns any relation 
to the formation of the large industrial combinations? 

27. What conditions must be present for the success- 
ful operation of the law of increasing returns? 

28. Describe the operation of the law of diminish- 
ing returns. Illustrate its application to agriculture. 



CHAPTER IV 

29. Account for the importance of transportation as 
an incident in production. 

30. What are the economic effects of improvements 
of transportation? 

31. Is transportation wasteful? Why? 

32. Describe the methods of transportation which 
have been used and discuss their efficiency. 

33. What is the effect of a new transportation route 
on markets? 

34. How does transportation affect the mobility of 
labor and capital? 

35. What effect does the increased mobility of labor 
and capital have on the price of land? 

36. What are the economic effects of improvements in 
urban transportation? 

CHAPTER V 

37. Describe the stages in the process of production. 

38. What are the characteristics of the Exploitative 
or Extractive stage? 

39. Give an outline of the conditions under which 
medieval agriculture was conducted. 

c— I— 29 



450 ECONOMICS 

40. What were the land owners' privileges and duties 
under compulsory cultivation? In what country did 
free hired labor first appear? 

41. Account for the change from the system of bond- 
age to the system of free hired labor. Account for the 
commercialization of land ownership. 

42. What system of land ownership preceded the 
medieval and modern systems? Explain it. 

43. How did the traditional objection to the sale of 
land arise in certain European Countries? 

44. What are the relative advantages of large and 
small farms? 

45. Show how the increased nobihty of labor due to 
the cessation of bondage facilitated the growth of in- 
dustry. 

46. Describe the effect upon European agriculture of 
the development of wheat cultivation in America. 

47. Account for the fact that in Great Britain the 
price of land was maintained while rents fell. 

48. Describe the system of metayer tenancies. Give 
a sketch of the condition of landowning in Europe. 

49. Why is the production of wheat assuming great 
importance ? Which are the great wheat-growing coun- 
tries ? 

50. Account for the great increase in the cultivation 
of wheat in Russia and in the Argentine. 



CHAPTER VI 

51. What causes have resulted in the change of the 
wheat-growing areas in the United States and Canada? 

52. Why are there specialist wheat farmers? What 
are the economic effects of this specialization? 



QUIZ QUESTIONS 451 

53. Why is agricultural capital relatively immobile ? 

54. "All agricultural communities borrow." Explain 
this statement. 

55. Compare the hazards of farming with the hazards 
of manufacturing. 

5Q. Why does the borrower of small sums of money 
require to pay relatively more for the accommodation 
than the borrower of large sums? 

57. What effect has the extension of the branch-bank 
system had on the farmers' interest rates ? 

58. What evils are the result of usurious rates? 

59. How do the farmers in the Canadian northwest 
make the most of easy-borrowing facilities? 

60. How much can be borrowed ordinarily on an im- 
proved quarter section in western Canada? How does 
distance from the centers of population affect the rate 
on farm mortgages? 

61. What is the farming situation in the Canadian 
northwest? 

62. What is the effect of the provision in the Canadian 
Bank Act (1913) which enables a farmer to give a lien 
on his movable property as security for a bank loan? 

63. Describe the characteristic features of co-opera- 
tive credit and discuss the advantages and disadvantages 
of it. 

64. Why is usury vanishing? How do farmers in the 
Canadian Northwest secure co-operative credit without 
formal organization? 

65. Are co-operative credit societies as necessary as 
they were formerly? 

66. What considerations must the farmer keep in 
mind in marketing his wheat crop? 

67. How does the farmer market his produce? 

68. How does grading affect the price? 



452 ECONOMICS 

69. Trace the course of wheat from the local elevator 
to the market. 

70. How is the crop movement financed? 

71. What are the advantages and disadvantages of 
speculation by the farmer in grain grown by himself? 
Discuss this (1) from the point of view of the farmer; 
(2) From the point of view of the consumer. 

72. Account for the diminution of ranching in the 
prairie provinces of Canada. 



CHAPTER VII 

73. Why is capital sometimes diverted into gold min- 
ing, in excess of possible production? 

74. Give an account of the chief incidents in the his- 
tory of the Rand mines in South Africa. 

75. What are the reasons for the relatively slow de- 
velopment of gold mining in British Columbia? 

76. Trace the changes in the value of silver expressed 
in the term of gold. 

77. What are the principal causes for the fall in the 
value of silver in terms of gold? 

78. Give an outline of the legislation of the United 
States on the silver question. 

79. What has been the effect of this legislation? 

80. Indicate the effect on the demand for commodities 
which enter into ordinary consumption of a new mining 
camp. 

81. From what countries has the labor and capital 
used in copper mining been drawn? 

82. Where are the large nickel mines? 

83. Describe the early developments in iron mining. 



QUIZ QUESTIONS 453 

84. What were the effects of the war of 1812-14 be- 
tween the United States and Great Britain and of the 
Peace of 1815 on iron production? 

85. What are the chief reasons for the comparatively 
low cost of the production of iron in the United States? 

86. Trace the developments of the iron industry in 
Canada. 

87. Where are the chief coal fields of the world? 
What invention was a big stimulus to coal mining? 

88. Illustrate the operation of the laws of increasing 
and of diminishing returns from coal mining. 

89. What are the causes of the economical methods 
of coal mining in tlie United States as compared with 
those in use in Europe? 

90. What are the general causes of the relatively high 
wages of agricultural laborers? 



CHAPTER VIII 

91. Describe the function of the manufacturing em- 
ployer. 

92. Discuss the effect upon manufacturing industries 
of concentration and specialization. 

93. What have been some of the consequences of lo- 
calization of industries? Examine the system of grant- 
ing bonuses by municipalities to industrial enterprises. 

94. Give a list of the desiderata in selecting a locality 
for an industrial enterprise. 

95. Account for the proximity of industries of a di- 
verse character. 

96. Mention some of the important causes of over- 
production. 

97. Why is it that a certain proportion must be ob- 



454 ECONOMICS 

served between the production of high durable but there- 
fore not immediately wholly consumable goods and that 
of goods that are immediately wholly consumable? 

98. What are the economic effects of over-production 
of railways? Mention some conspicuous instances. 



CHAPTER IX 

99. Is over-production of agricultural products pos- 
sible ? 

100. Is marketing a phase of production? 

101. Does the making of a favorable bargain by one 
of the parties to a transaction increase the wealth of a 
nation to which both parties belong? 

102. Is "exploitative bargaining" injurious to the 
"national dividend"? 

103. Is advertising economically justifiable? 

104. Under what conditions may advertising benefit 
the consumer? Illustrate the laws of increasing and di- 
minishing returns from the practice of advertising. 

105. Discuss the economic justification of the middle- 
man. 

106. What are some of the implications of the growth 
of distributive co-operation? 

107. Describe the conditions in seasonal trades. Illus- 
trate. What would be the economic effect of a charitable 
endoA^Tnent for the purpose of maintaining tradesmen in 
seasonal trades during the period when they are not em- 
ployed ? 



QUIZ QUESTIONS 455 



PART II: EXCHANGE 

CHAPTER I 

108. What are the characteristics of barter? 

109. Give examples of primitive barter. 

110. What is the principal characteristic of money? 
Give an account of barbaric money. 

111. To what circumstances is the position of gold and 
silver as money due? What is the relation of the pay- 
ment of tribute to state control of currency? 

112. Explain the meaning of the expression, "Com- 
mon denominator of value." Does the expression 
"measuring rod" sufficiently explain the function of 
money? 

CHAPTER II 

113. What are the foundations of value? Explain 
the expressions "value in use," and "value in ex- 
change." 

114. What are the most conspicuous criteria of util- 
ity? 

115. Discuss the relation between desire and utility. 

116. State the "law of diminishing utility." Give an 
example. 

117. Illustrate disutility. 

118. Trace the connection between the physical prop- 
erties of things and their utilities. Explain what is 
meant by the word commodity. 

119. What is meant by a free gift of nature? 

120. How does exchangeability affect value? 

121. Define "effective demand." 



456 ECONOMICS 

122. Discuss the relation between supply and demand. 
What are the immediate and remoter effects of an in- 
creased demand upon the supply of a commodity the 
raw material of which is abundant? 

123. What is meant by the "law of substitution"? 

CHAPTER III 

124. Explain the different senses in which the word 
market may be used. 

125. Describe the market at Nijni Novgorod. 

126. Do safe routes benefit a market? 

127. Name well-known modern and ancient market 
places. 

128. Give some examples of local markets. Narrate 
from personal observation the course of affairs in some 
local market. 

129. Describe the characteristic features of the market 
in a general sense. 

130. What should we consider in a study of the mar- 
ket? 

131. Indicate the groups of which a market is com- 
posed. 

132. Howis the market price arrived at? Under what 
circumstances do prices fall in a market? Under what 
circumstances do prices rise in a market? 

133. Account for the influences of one market upon 
another. 

CHAPTER IV 

134. Discuss the medieval expression "a just price." 

135. Are customary prices and variations in prices in- 
consistent? Explain. 



QUIZ QUESTIONS 457 

136. What is meant by the expression "Money is the 
standard of value"? 

137. Upon what conditions do the relative values of 
gold and silver depend? Describe the effects of changes 
in the quantities of the precious metals available for 
currency purposes. 

138. Discuss the influence of monetary law upon cur- 
rency. What was the extent of the influence of the 
Latin Union? 

139. Why does a change in the price of silver affect 
the prices of commodities in international exchanges? 

140. What does bimetallism mean? Why must bi- 
metallism be a matter of international agreement? 
What is the object of bimetallism? To what extent 
would the adoption of bimetallism render prices less vari- 
able? 

CHAPTER V 

141. In what manner do climatic changes affect 
prices? Illustrate. What are some of the effects of a 
deficiency in the wheat crop? In what way does it in- 
fluence supply and demand? What are some of the 
effects of an abundant harvest? 

142. Discriminate between those public expenditures 
which increase demand from those which merely divert 
it. What effects has war upon the demand and supply 
of foodstuffs ? Discriminate between different cases. 

143. Account for the varying influence of political 
events upon prices. 

144. Describe generally the influence upon prices of 
changes in production. 

145. In what way does demand stipulate supply and 
diminish price? How does diminished price react upon 



458 ECONOMICS 

the cost of production ? What is meant by the marginal 
manufacturer ? 

146. Discuss the action of the law of substitution in 
relation to the process of these. 

147. Exjilain the expression "complementary groups 
of commodities." 

148. Under what conditions does an increase in the 
population result in an increase in demand? 

149. What are the causes of the concentration of 
population in urban centers ? 

150. What are the causes of rural depopulation? 

151. Discuss the economic effects of migration in re- 
lation to prices. 

152. How do changes in the standard of comfort 
affect demand? How has increased demand reacted 
upon the price of tea? What are the chief causes of the 
increase in the price of beef? 

153. Give illustrations of the manner in which the 
change of fashion has influenced prices. 



CHAPTER VI 

154. What is the role of competition in the new de- 
termination of prices? 

155. Explain the expression "monopoly." 

156. Does a monopoly of supply necessarily mean an 
excessive price? What is the monopoly price? 

157. Distinguish between a legal monopoly and an 
attempt at commercial monopoly. 

158. What contingencies affect the exercise of mo- 
nopolies? How does the law of substitution affect the 
exercise of monopolies? 

159. Give a sketch of the history of the monopoly of 



QUIZ QUESTIONS 459 

carrying letters and messages with which the British 
Post Office is endowed. 

160. Account for the difficulty of making a monopoly 
of any kind effective. 

161. Discuss the operation of a "trust." 

162. Are monopoly prices excessive? 

163. What is the reason for the attitude of public 
aversion from commercial combinations? 

164. Examine the statement "landowning is natu- 
ral monopoly." Why is land hard to monopolize ? Dis- 
cuss some of the results of commercialization of land. 
What is meant by the mobility of property in land? 

165. What is the history of fluctuation in land prices? 

166. In what sense do areas of land compete with one 
another? 

167. Describe the connection between the price of 
land and the rate of interest and account for it. 

168. Show how the change in geographical relations 
caused by the opening up of the new routes has affected 
prices of commodities. Estimate some of the economic 
effects of the opening of the Panama Canal. 



CHAPTER VII 

169. In what manner does the expansion or the con- 
traction of credit affect prices? 

170. How does the quantity of money in circulation 
affect prices? 

171. What is the effect of periodical payments on 
prices? 

172. Describe the clearing house system. How are 
"legal tenders" used? 

173. What is meant by the "autumnal drain of gold" ? 



460 ECONOMICS 

174. Explain the expression "velocity of return capi- 
tal." 

175. What is the relation of gold and silver to credit? 
What have been effects of large new increments of gold? 

176. How ma}^ customs duties upon imports affect 
the amount of gold in circulation? How may differen- 
tial railway rates be employed to increase a gold re- 
serve? What is meant by "gold reserves"? 

177. Define fiduciary currency. 

178. What are the limits of the issue of a fiduciary 
currency? 

179. What is the effect upon prices of commodities 
of an excessive issue of fiduciary currency? What is 
the effect upon the character of the money in circu- 
lation when excessive issues of fiduciary currency take 
place? 

180. What are the chief constituents of international 
balances ? 

181. What are the chief causes of credit crises? 

182. Why are banking reserves necessary? 

183. Describe the means which may be taken to avoid 
credit crimes. Can gold reserves be excessive? What is 
the effect of hoarding gold? 

CHAPTER VIII 

184. Explain the expression "demonetization of sil- 
ver." What is the influence exerted upon prices of fa- 
cilities for obtaining credit? 

185. How does an excise duty affect the price? An 
import duty? 

186. Upon what principles can it be discovered 
whether the consumer or the foreign producer bears the 
burden of an import duty? What conditions ought to 



QUIZ QUESTIONS 461 

be kept in mind in investigating the economic effects 
of an import duty? 

187. What is the general effect upon prices of specu- 
lation? What is the justification of wheat "futures"? 

188. Examine the provision regarding bank liens 
upon wheat in the Canadian Bank Act, 1913. Under 
what circumstances may a "corner" in wheat be success- 
fully carried out? 

189. Examine the statement that if there were some 
other "measuring rod" than gold or silver, there would 
be fewer fluctuations of prices of commodities. 

190. Is a general advance of prices a usual phenom- 
enon? Discuss. What is the relation between prices 
and wages? 

191. State the theory of trade cycles and discuss its 
validity. 

192. Why is distribution necessary? Is distribution 
necessary under a system of simple production? 



462 ECONOMICS 

PART III: DISTRIBUTION 
CHAPTER I 

193. Why is "ideal justice" impossible of realization? 

194. If every one were rewarded with the whole value 
of his product, would there be equality of possession? 

195. Communism is the only system in which complete 
equality is possible. Discuss this statement. 

196. Show the relation between the factors of pro- 
duction and the shares in the value of the product. De- 
scribe the medieval practice in distribution and discuss 
its advantages and disadvantages. 

197. Describe the influence of the guilds upon in- 
dustrial regulation. 

198. Indicate some of the consequences of the decay 
of the medieval system of control. Account for the rise 
of the class of free hirable laborers and describe the effect 
of this upon wages. 

199. Account for the emergence of competition. De- 
scribe some of the economic effects of the mobility of 
labor. 

CHAPTER II 

200. Why does the value of the product in the market 
afford no indication of the relative share of the con- 
tributories to production? Illustrate. 

201. How are productive enterprises classified? What 
is the present tendency in productive enterprises? Why? 

202. What factors have contributed to the growth of 
large corporations? What are the consequences of this 
development ? 



QUIZ QUESTIONS 463 

203. How has the development of large enterprises 
affected the relations between large and small cap- 
italists ? 

204. What are the functions of the entrepreneur? 
How does he discharge them? 

205. How are the results of production distributed? 

206. How may the surplus be divided? 

207. Does the entrepreneur determine what shall 
be the share of each contributory to the productive 
processes ? 

208. Under what circumstances does an advance in 
the price of the finished product react upon rent, interest 
and wages? 



CHAPTER III 

209. What is profit ? Should depreciation be charged 
before figuring a profit? 

210. Profit arises either by design or adventitiously. 
Explain. 

211. Describe the normal role of the shareholders in 
joint stock enterprises. Why is it difficult for them to 
exercise effective control? 

212. What are the objects of employers' associa- 
tions? 

213. What is the significance of the development of 
superintending labor? 

214. Account for the relatively high salaries of com- 
petent superintendents. 

215. Why is a competent superintending class of ad- 
vantage to manual labor? Is it economically advan- 
tageous for a country to extend public funds for the 
provision of technical education ? 



464 ECONOMICS 

216. What are the characteristics of the labor market? 
Classify manual laborers. In what way is competition 
in the labor market mitigated? 

217. Discuss the advantages and disadvantages 
of the establishment by trade unions of an uniform 
wage. 

218. Discuss "old age pensions." 

219. Why is it difficult to organize labor in trades in 
which the requisite skill is low? What is the relation of 
the system of uniform wages to the organization of 
labor? 

CHAPTER IV 

220. Discuss the question of the mobility of labor. 

221. In what sense is labor a perishable commodity? 
What are the characteristics of a laborer as such? 

222. Is the value of wages determined in the same 
manner as that of other commodities? 

223. Distinguish between nominal and real wages. 

224. How are wages determined? 

225. What is meant by marginal wage? 

226. Discuss the demand and supply prices of labor. 

227. Explain the meaning of reserve price of labor. 

228. What is meant by the reserve of labor? 

229. What factors influence the labor reserve? 

230. Discuss minimum and maximum wages. 

231. Examine the doctrine that the value of products 
is due to the labor which is exercised upon them. 

232. Why is distribution not based upon the product? 

233. In what sense are wages advanced by capitalists? 

234. How does voluntary co-operation accomplish the 
same object as capitaHsm? 



QUIZ QUESTIONS 465 

CHAPTER V 

235. What is the essential feature of modern indus- 
trial organization ? 

236. Describe the beginnings of trade unionism. 

237. What were the characteristics of the new union- 
ism? What has been the effect on trade unionism? 
What was the significance of the strikes in Great Britain 
in 1911? Distinguish "the general strike" from an or- 
dinary dispute about wages. 

238. Describe the advantages of trade unionism. 

239. Under what conditions will a strike for an ad- 
vance of wages be likely to succeed? 

240. What is meant by collective bargaining? Indi- 
cate its advantages. Why is it objected to by the In- 
dustrial Workers of the World? 

241. Give an account of the economic effects of trade 
unionism. Give a brief account of the present phase. 

242. Discuss the status of trade unionism in the 
United States, 

243. To what does trade unionism owe its origin in 
Canada? Has trade unionism grown in Canada? Why? 

244. Account for the growth of international trade 
unionism in America and the absence of it in Europe. 

245. What is meant by the expression "open shop," 
"closed shop"? 

246. Why are the wages of women in general less 
than those of men? 

247. Under what circumstances are voluntary union 
men's wages paid? 

248. What are the arguments for and against a statu- 
tory maximum wage? 

249. What are the economic effects of the fixation of 
a statutory maximum wage ? 

C— I— 30 



466 ECONOMICS 

250. Examine the argument for conciliation and arbi- 
tration in labor disputes. 

251. Give an account of the relation of trade unionism 
and economic theory. 

CHAPTER VI 

252. Why did all interest appear in the middle ages 
to be usury? Account for the idea that interest is paid 
for the use of money. 

253. How did the idea that interest is the reward of 
saving arise? 

254. What element of truth lies in each of these ideas? 

255. Explain the agio theory of interest. 

256. Analyze the constituents of the market rate of 
interest. 

257. Distinguish between the different compartments 
of the money market. 

258. Why is there more competition in the money 
market than in any other? Why is concentration of cap- 
ital indispensable under modern industrial conditions? 
Give a list of the important local money markets 
and explain the reason for the place of each of them in 
the international market. Account for the relatively 
liigh rate of interest in new countries. 

259. What is the function of capital? 

260. Why is the accumulation of capital indispensable 
to progress ? Account for the chronic scarcity of capital 
in relation to the demand for it. Illustrate the answer, 
using an illustration other than railways. 

261. Why were the American railways constructed 
at a minimum of cost ? 

262. What was the effect of American railway con- 
struction on Europe? Explain the expression "velocity 
of return of capital." 



QUIZ QUESTIONS 467 

CHAPTER VII 

263. Distinguish between the practice in Europe and 
that in America respecting ownership and occupancy 
of land. 

264. Account for the emergencies of rents in a coun- 
try where obligatory labor has been in vogue. Upon 
what valuable consideration was the payment of such 
rents based? What is non-economic rent? 

265. What were the advantages of indefeasible occu- 
pancy of land? Account for the commercialization of 
land. 

266. Discuss the benefits and drawbacks of farming 
under conditions of tenancy. 

267. On what grounds does the policy of speedy 
alienation of public lands commend itself to the govern- 
ments of new countries? 

268. What is the result of the increase in land prices? 

269. What are the social results of the growth of a 
landowning and non-cultivating class? 

270. Show the connection between the commercializa- 
tion of land and the development of the theory of rent. 
Relate the doctrine of economic rent to the law of dimin- 
ishing returns. Rent is a "net product." Explain this 
statement. 

271. Is it a sufficient explanation of rent to say that it 
is a surplus? Why? 

272. Examine the theory of rent which bases rent 
upon differential advantage. 

273. How far may this theory of rent be extended to 
account for rents other than those for land? 



468 ECONOMICS 

TART IV: CONSUMPTION 
CHAPTER I 

274. Into what divisions may the department of con- 
sumption be separated? Accomit for the expediency of 
this separation. 

275. How may the demand of governments for pur- 
poses of national consumption be divided? 

276. What is the effect of governmental consumption 
upon consumption in general? 

277. Plow do the heavy borrowings of government 
and municipalities affect the general money market? 

278. What are some of the economic effects of pri- 
vate benefactions? 

CHAPTER II 

279. Discuss the classification of personal consump- 
tion. 

280. Illustrate the law of substitution as applied to 
food. 

281. What was the effect of concentration of manu- 
facture upon the character of clothing? How has de- 
mand been influenced by standardization of clothing? 

282. Is the mechanic of to-day likely to have more 
domestic comforts than Queen Elizabeth had in her 
palace ? 

283. Discuss the advantage and drawbacks of owner- 
ship of their house by workingmen from the point of 
view of the expediency of nobility. Under what con- 



QUIZ QUESTIONS 469 

ditions were the earlier experiments in semi-philan- 
thropic housing schemes carried on? 

284. Account for the disappointment which has at- 
tended many housing schemes. 

285. Why did the employes of the Singer Sewing 
Machine Company in Glasgow travel twelve miles daily 
to their work rather than live in the houses provided 
by the company? 

286. What are the chief reasons for the greater prev- 
alence of ownership by the occupants of houses in Amer- 
ica than in Europe? 

287. Why is competition in the business of building 
houses to let them for rent not active excepting after 
the close of a period of industrial activity? Why is the 
housing question most acute in new countries? What 
are the economical reasons against philanthropic hous- 
ing? What would be the economic effect of the sudden 
enforcement of drastic public health laws? 

288. Account for the growth of the miscellaneous ex- 
penditure of all classes. 

289. Give an account of the constituents of consump- 
tion and account for their relative proportions. 

290. Explain the different senses in which the ex- 
pression "cost of living" may be used. What are 
some of the effects of an advance in the price of 
wheat? 

291. Do high prices always mean a low standard of 
comfort and do low prices necessarily mean a high stand- 
ard of comfort? 

292. What commodities have been subject to the most 
important advances between 1890 and 1909? 

293. What are the reasons for the appearance of the 
products of the extractive industries among the more 
important commodities which have increased in price 



470 ECONOiAlICS 

during the last twenty years? Show how the sharpness 
of the advance of prices disturbs the economic equihb- 
rium. 

294. Discuss the relation of the question of the trusts 
to the question of the cost of living. Illustrate the 
danger of the adoption of artificial means of checking 
advances of price. Illustrate the connection between 
movements in the standard of comfort and movements 
in prices. 



CHAPTER III 

295. Distinguish different kinds of national resources 
in respect to the uses of which they are susceptible. 

296. What are the reasons for the indifference to the 
rate of consumption of natural resources in the United 
States and Canada in the earlier states of exploitation? 

297. Why is rapid exploitation of natural resources 
necessary in new countries? 

298. Account for the rapid growth of organized life 
in new countries. Why must the people of new coun- 
tries borrow largely? Why must the people of the 
United States and Canada produce immediate returns? 

299. Discuss the limits of legislative restriction upon 
exploitation. 

300. Why is the community interested in the pro- 
longation of the lives of the persons which compose it? 

301. Describe some of the reactions of consumption 
upon production. 

302. How does distribution react upon consumption? 

303. Do price movements affect consumption? 



QUIZ QUESTIONS 471 



PART V: THE ECONOMIC ASPECTS OF 
THE STATE AND MUNICIPALITY 

CHAPTER I 

304. Discuss the laissez-faire policy as propounded 
by the Physiocratic writers. 

305. How may the state regulate foreign trade? 

306. What are the characteristics of a protective 
tariff? 

307. Under what conditions may the political and 
commercial interests of the state be divergent? 

308. What are the characteristics of a tariff for rev- 
enue only? 

309. What is the meaning of the expression "free 
trade"? 

310. What are the reasons for the failure in Great 
Britain of the propaganda for protection? What is a 
reciprocal tariff? 

CHAPTER II 

311. Describe the change from municipal regulation 
of industry to state regulation. 

312. Is state regulation more practicable under the 
"factory system" of industry than under the domestic 
system? 

313. What are the general arguments for industrial 
regulation by the state? What are the arguments for 
state regulation of industry? 

314. Indicate the objections to the bonusing of indus- 
tries by the state or by the municipality. 



472 ECONOMICS 

315. What is the reason of the state regulation of rail- 
ways, banks and similar enterprises? 

316. What is the relation between the government and 
the banks in Canada? 

317. What are some of the implications of govern- 
mental regulation? 

318. What are the disadvantages of government con- 
trol? 

319. How are the railways regulated in Canada? In 
the United States? In England? 

320. On what grounds may the reduction of railway 
rates in general by railroad commissions be regarded at 
least doubtful? 

321. Define a "Trust." 

322. Illustrate the above answer by a brief account 
of the history of a trust other than the Standard Oil 
Company. 

323. Account for the furore against the trusts which 
exists in the United States. 

324. Indicate the difficulties of regulating trusts. 

325. Describe the usual process of the formation of a 
trust. 

326. Account for the practice of "stock watering." 

327. Examine the conclusion of the Industrial Com- 
mission respecting the influence of trusts upon prices. 

328. What light does economic history throw upon 
state administration of public lands? 

329. Why are liberal land grants expedient in new 
countries? Account for the large land grants to rail- 
ways in the United States and Canada. 

330. Why must unoccupied areas be colonized as rap- 
idly as possible? What difficulties lie in the way of 
resumption by the state of the public lands ? Would the 



QUIZ QUESTIONS 473 

nationalization of land necessarily increase the "national 
dividend"? 

331. Enumerate the advantages of state operation 
of industry and trade. 

332. On what grounds may the increase of the na- 
tional dividend under a collectivist system be doubted? 

333. How far is the growth of the trust consistent 
with collectivism? What effect upon international com- 
merce and upon the movement of capital would be pro- 
duced by a collectivist system adopted by one nation 
only? 



CHAPTER III 

334. Classify the constituents of the public revenue. 

335. Why is a tax "good" in one country regarded 
with hostility by the people of another? Illustrate di- 
rect and indirect taxes. 

336. Why is it to the interest of creditor countries to 
admit imports without undue impediments? Indicate 
some of the economic effects of the extensive borrowing 
of money by Canada from Great Britain. 

337. In what form have loans been received by Can- 
ada? Show how the imports of a country should be 
analyzed in order to ascertain how far national consump- 
tion is for productive purposes. 

338. Why is it that countries where industries are 
highly protected cannot export manufactured foods ex- 
cept by "dumping" and must therefore export either 
raw materials or partially manufactured goods ? What 
are the characteristics of a prohibitory tariff? 

339. Give a brief sketch of the tax policy of Can- 
ada. Account for the reluctance on the part of the peo- 



474 ECONOMICS 

pie of the United States and Canada to impose heavy 
taxes upon land. 

340. Indicate the changes which have taken place in 
the doctrine of the functions of the state. How does 
the state endeavor to equalize wealth? 

341. Give an outline of the theory of taxation. What 
is the relation of the doctrine of the absolute sovereignty 
of the state to the theory of taxation? 

342. Who pays the taxes? 

343. From what source is a tax upon unused land 
paid? 

344. Who must shoulder the burden of taxation when 
manufacturers are operating their industries without a 
profit ? 



CHAPTER IV 

345. Discriminate the different classes of public ex- 
penditure. Why is public expenditure increasing? 

346. Describe the procedure connected with the intro- 
duction of the Budget in the British and Canadian Par- 
liaments. Contrast the English and French systems of 
keeping public accounts. 

347. Account for the growth of national debts. 

348. What is the connection between the development 
of the money market and the growth of government 
loans ? 

349. Describe the method in which banking is facili- 
tated by the existence of government securities. 

350. Explain the vai-ious methods which are adopted 
in issuing government loans. 

351. Account for the fall in the price of the securities 
of a stable government. 



QUIZ QUESTIONS 475 

352. What is the relation between such a fall and 
the rate of interest? 

353. What are the characteristics of the National 
debt of the United States? Where are Canadian bonds 
largely held? 

354. Describe the terminable annuity system. 

355. Explain the methods of conversion and redemp- 
tion of public debts. 

356. Discuss the question of state monopolies. 

357. What is the bearing of the law of substitution 
upon state monopolies? Illustrate. Indicate the eco- 
nomic limits of state and private monopolies. Does state 
monopoly as applied to public services always obviate 
the difficulties which arise in the performance of these 
services by joint stock companies? 



CHAPTER V 

358. Distinguish between the financial powers of the 
Federal Government and of the several states of the 
Union. Distinguish between the financial powers of 
the Dominion Government and of the Provincial Gov- 
ernment. 

359. Under what circumstances was Ontario driven 
into the taxation of corporations and the imposition of 
succession duties? 

360. What kind of a tax is the corporation tax? 

361. Discuss the question of prison labor from an 
economic point of view. 

362. Compare municipal taxation in Canada and 
United States to similar taxation in Europe. 

363. Discuss the policy of exemption of ecclesiastical 
and educational property from taxation. 



476 ECONOMICS 

364. Account for the heavy expenditure of municipal- 
ities in Canada and the United States. 

365. Why are municipal debts increasing so rapidly 
in America? 

366. Discuss the reactions of the taxation of land and 
the exclusion of improvements. 

367. Describe briefly the course of municipal history. 

368. How does the Local Government Board aid in 
financing municipalities? What is one of the practical 
results of this method? 

369. Account for the growth of municipal enterprise. 

370. Discuss the relative advantages of utilizing the 
profits from municipal enterprises in reduction of tax- 
ation and in the reduction of the price of the services 
or in the improvement of them. 

371. Indicate some of the difficulties encountered by 
municipal enterprise. 

372. What has been the effect of the extension of mu- 
nicipal functions? 

373. What is the status of municipal enterprise in the 
United States? 

374. In Canada? 

375. Describe the German municipal system. 

376. Account for the demand for commission govern- 
ment in American cities. 

377. Discuss the reactions of the extension of munici- 
pal enterprises. 



CHAPTER VI 

378. Account for the leadership of England in fac- 
tory legislation. 

379. Discuss the expediency of a statutory fixation of 



i 



QUIZ QUESTIONS 477 

the hours of labor: (a) for women and children; (b) 
for adult men. 

380. Discuss the advantages and disadvantages of the 
short working day. 

381. What were the defects in the law of employers' 
liability which led to the demand for workmen's com- 
pensation for industrial accidents? 

382. Give a short account of the German system of 
accident insurance. 

383. How is the German system financed? Why has 
it been successful? 

384. Describe the English system of workmen's com- 
pensation. 

385. What has the United States done along these 
lines ? 

386. Indicate the principal questions of economic in- 
terest in schemes of workmen's compensation. 

387. Exam.ine the sj'^stem of group responsibility for 
industrial accidents. 

i 388. Discuss the assumption of the cost of compensa- 
tion for industrial accidents. 

389. What are the effects on the workmen of the com- 
pensation acts? Illustrate. 

390. In what country did old age pensions first ap- 
pear? 

391. Give a brief account of the development of the 
demand for old age pensions. 

392. Is an old age pension law practicable in Canada? 

393. Describe the functions of the labor exchange. 

394. Discuss the possibilities of the government's re- 
lation to labor exchanges. 

395. Is the "right work" admitted? 

396. Indicate the measures which have been taken to 
deal with the question of unemployment. 



478 ECONOMICS 

CHAPTER VII 

397. What is the status of insurance against unem- 
ployment ? 

398. Define Socialism. Trace its history. 

399. Account for the rise of modern socialist ideas. 
Describe the changes in the doctrines of the state which 
are related to the growth of socialism. 

400. Classify the various socialist doctrines. Exam- 
ine the policy of "direct action." 

401. Discuss the derivation of the various socialist 
doctrines. 

402. Why is international socialism at once necessary 
( from the socialist point of view ) and difficult ? To what 
circumstances may the growth of syndicalism be attrib- 
uted? 

403. Explain the meaning of "Class consciousness." 
Examine the pohcy of collectivism in the light of the 
discussions in the text upon the economic aspects of the 
state. 



INDEX 



Act, 

Appropriation, 375. 

Bank, Canadian, 416-417. 

Bland— Allison, 78-79. 

Canada and States of the Union, 
14-15. 

Customs, 375. 

Emancipation, Russia, 42. 

Employers' Liability, 415-416. 

Factory, 338, 369. 

Manitoba Grain, 69. 

Mines, 338. 

Old-age Pensions, 227. 

Sherman, 79. 

Trust, 263. 

Workmen's Compensation, 416-417, 
420-421. 
Accident Compensation, 

Cost, 425-427. 

Economic effect, 427. 

Employers' Liability Acts, 415-416. 

English system, 420-421, 425-427. 

German system, 417-420. 

Responsibility, 422-425. 

U. S. System, 421-422. 

Workmen's Compensation Acts, 
415-416. 
Advertising, 99-100. 
Agio, 

Explained, 270. 
Agriculture, 

As exploitation, 39. 

Capital of, 53-56. 

Commercial, 41-43. 

Compulsory, 39-43. 

Co-operative credit, 63-66. 

Farm loans, 56-59. 



Agriculture (Continued). 

Farm mortgages, 60-62. 

Labor in, 87. 

Meat production, 73-74. 

Rent in, 279-280. 

Scientific, 48-49. 

Technique of, 51. 
Anarchism, 442. 

Arbitration, 262-265 (see Wages). 
"Autumnal drain," 174. 



Bakuin, 442. 

Bank (see Credit), 

Balances, 172-173. 

Regulated by state, 342. 

Reserves, 181-183. 
Barter, 

Economy, 104-105. 

Primitive, 104-106. 
Bargain, 

Effect on production, 132-134. 
Bentham, Jeremy, 435. 
Bimetallism, 138-139 (see Gold). 
Birth-rate, 

Decline in France, 48. 

Effect on consumption, 148. 
Bismarck, 

State insurance policy, 437. 



Capital, 

Agricultural (see Agricultural). 
Circulating, 21-22. 
Diversion of, 291-293. 
Fixed, 21-22. 



479 



480 



INDEX 



Capital (Continued). 

Function of, 272-275. 

Government expenditure of, 289- 
293 (see Public Expenditure). 

In long-settled communities, 319. 

In new countries, 323-325. 

Relation to interest, 266-268. 

Requisite of production, 201-202. 

Scarcity of, 275-277. 

Sources of, 22-23. 
Charity endowment and legislation, 

293. 
Christian socialists, 44.1. 
Clothing, 

Customs regarding, 297. 

Standardization of, 298. 
Collectivism, 441, 442. 
Commission government, 407. 
Communism, 

Doctrine of, 441. 

During production, 245-247. 

Explained, 200-201. 

Spirit Wrestlers, 201. 
Competition, 

Between America anl Great Brit- 
ain, 336. 

Explained, 155-156. 

In labor market, 225-226. 

In land selling, 164-165. 

Of capital, 271. 

Perfect, 187. 

Protective tariif, 331-332. 

Result of unrestricted trade, 204- 
206. 

Tending toward monopoly (see 
Monopoly). 
"Complementary commodities," 147- 

148. 
Complex production. 

Defined, 16. 

Functions in, 23. 

Ownership in, 18. 

Possibilities of dispute in, 200. 

Requisites of, 17. 
Conciliation, 262-265 (see Wages). 
Conservation, 

Commissions, 318. 

Of natural resources, 317-319. 



Considerant, 486. 
Consumption, 

Classified, 288-289, 

Cost of living, 182-183. 

Distribution, reacting upon, 326- 
327. 

National, 289-293. 

Of human life and energy, 324- 
325. 

Of natural resources, 316-317. 

Personal, 294-295, 306-308. 

Proportions of constituents of, 
308. 

Reaction upon exchange, 327-328. 

Reaction upon production, 325- 
326. 
Corporations, 

Effect of, 211-212. 

Importance of, 209-211. 

Reason for, 25. 

Standard Oil, 346-348. 
Cost of living, 308-315. 
Credit, 

Agricultural (see Agriculture). 

Among laborers, 231. 

Bank balances, 172-173. 

Bank reserves, 181-183. 

Contraction of, 170, 180. 

Crisis of 1907, 175-176, 183. 

Expansion of, 170. 

Fiduciary currency, 176-180. 

In new countries, 322-323. 

International, 172-173, 361-363. 
Crisis of 1907, 175-176, 183. 
Crop movements. 

Financing, 71. 
Currency (see Money). 

Crisis of 1907, 175-176, 183. 

Elastic system, 183. 

Fiduciary, 176-180. 

"Legal tender," 172, 182, 185. 



D 



"Dead point," 27. 
Demand, 

As affected by Government con- 
sumption, 291. 



INDEX 



481 



Distribution, 

Explained, 5, 7, 197. 

Present system, 199-200. 

Reaction upon consumption, 336- 
327. 

Relation to production, 19. 

Significance of, 196. 

Why not based on product? 243- 
244. 
Duty, 

Customs, 186-189. 

Excise, 185-186. 



E 



Efficiency, 

Dependent upon food, 296-297. 
Employer, 

Aim, 215-216. 

Associations, 220-221. 

Double function, 215. 

Entrepreneur, 23. 

In 18th century, 208. 

Position in distribution, 212-213. 

Profit, 218-220. 
"Engrosser," 346-347. 
Emancipation Act, Russia, 42. 
Exploitation, 

Agricultural, 39-42. 

Bargaining, 99. 

First stage in production, 37. 

Meat production, 73-74. 

Mining, 75-88. 

Process of, 38. 
Exchange, 5-7. 

(See Barter.) 

(See Money.) 

As reacted upon by consumption, 
327-328. 

Markets (see Markets). 

Prices (see Prices). 

Utility and value, 112-121. 
Extraction (see Exploitation). 

F 

Factory system, 

Facilitating industrial conditions, 
338. 

C— I— 31 



"Fair exchange," 132-134. 
"Fair Trade," 335-336. 
Firm, 

Defined, 208. 
Food, 

Diversity of, 295-296. 

History of, 295. 

Law of substitution, 295. 

Necessity for, 295. 

Relation to work, 296. 
Free grant. 

Area of, 51. 
Free trade. 

Beginning of, 329. 

In Great Britain, 333-336. 
Fourier, 436. 



G 



George, Henry, 

Propaganda in California, 42. 
Gold, 

Amount in existence, 135. 

As money, 108-110. 

"Autumnal drain," 174. 

Bimetallism (see Bimetallism). 

Hoarding, 176, 183-184. 

International credit, 173-174. 

Mining, 75-77. 

Panic of 1907, 175-176. 

Relation to prices, 137-138, 174- 
176, 180-181. 

Reserves, 181-183. 
Government, 

Expenditures, 289-293 (see Con- 
sumption). 

Functions of, 4. 

Industry, 387-389. 

Industry and, 329-359. 

Labor exchanges, 430-432. 

Legislation, 337-359. 

Loans, 377-378. 

Local (see Municipal Govern- 
ment). 

Notes, 177-179, 181-182. 

Securities, 378-380. 
Grain Growers' Association, 70. 



482 



INDEX 



H 

Hanseatic League, 210. 
"Hedging" (see Speculation). 
Homestead grant plan. 

In Canada, 283. 
Housing, 299-313. 



Joint stock company (Contitmed). 
Growth of, 210. 
Profit in, 220-221. 
Result of, 210-211. 



K 



Kropotkin, Prince, 441. 



Immigrants, 

As exploitative laborers, 88. 

As members of trade unions, 254. 

Italian, in New York, 148. 
Immigration, 

Effect on population, 148. 

Induced by natural resources, 320- 
321. 
Industrial, 

Commission on trusts, 353. 

Unionism, 265. 

Workers of the World, 252-253. 
Industry, 

Accident compensation in (see Ac- 
cident Compensation). 

In middle ages, 337. 

Localization, 90-92. 

Nationalization of, 356-357, 387- 
389. 

Regulated by state, 337-359. 

Trade unionism (see Trade Union- 
ism). 
Interest, 

Current theory, 268-269. 

Defined, 268-269. 

Early theories, 267-268. 

History of, 266-267. 

In new countries, 321-323. 

Market rate, 269-272. 

Statutory limitation, 202. 
International trade. 

Credit in, 173-174. 

Fiduciary currency in, 179. 



Joint stock company. 

Conducting productive enterprise, 

208-209. 



Labor, 

Accident compensation (see Ac- 
cident Compensation). 

Bargaining and, 98-99. 

Combinations, 247-248 (see Trade 
Unionism). 

Determining rent, 279-280, 285- 
286. 

Difficulty of transporting, 228. 

Directive, 20. 

Division of, 15, 20, 93. 

Does not determine value of prod- 
uct, 242-243. 

Efficiency, 233-234. 

Elements of, 15. 

Exchanges, 430-432. 

In exploitative industries, 87-88. 

Joint, 18-19. 

Location of industry affected, 92. 

Manual, 20, 39, 225-226. 

Marginal, 236. 

Mobility of, 229-230. 

Of women, 256-257. 

Organizations, 228. 

Party, 249. 

Perishable commodity, 230-231. 

Requisite of production, 14, 202. 

Reserves, 237. 

Superintending, 20. 

Supply and demand prices of, 236- 
237. 

Support of, during production, 
244-245. 

Transportation affecting, 35. 
Laissez-faire, 

Defined, 329. 



INDEX 



483 



Land, 

As a commodity, 379-280. 

Distribution by state, 354-356. 

Increase of prices, 283-284, 

Monopoly of, 162-163. 

Occupation of, 17 (see Produc- 
tion). 

Ownership of (see Land Owner- 
ship). 

Prices of, 163-167. 

Requisite of production, 202. 

Synonym for "nature," 38. 

Taxation on, 369-370, 374, 398-399. 

Transportation affecting, 35. 

Uses of, 17. 

Value and rent, 278-279. 
Land ownership. 

Advantages of, 281. 

Commercial, 43-45, 205, 364-365. 

Distinction attending, 47. 

European, 48-50. 

Landholder, 21, 23, 44-45. 

Medieval, 39-40, 42. 

Modern, 41-42. 

Monopoly in, 162-163. 

National, 353-354. 

Policy in U. S. ^'nd Canada, 282- 
283. _. 

Quasi-monopoly in, 281. _____ — — -— 

Small farmer, 45-46. 

Tribal, 43. 
Law, ':.-' — • 

Accident Insurance, German, 418- 
419. 

Canadian Homestead, 14. 

Of diminishing returns, 26-28, 85- 
86, 100. 

Of diminishing utility, 115. 

Of entail, 47. 

Of family, 2. 

Of household, 2. 

Of increasing returns, 24-26, 100. 

Of marginal disutility, 129. 

Of marginal utility, 128-129. 

Of primogeniture, 47. 

Of substitution, 120-121, 158-160, 
295. 
'Legal tenders," 172, 182, 185. 



M 

Manufacture, 

Division of labor, 93. 

Finished product, 17-19, 30. 

Instruments of, 16-17. 

Localization, 90-92. 

Over-production, 93-95. 

Second stage in production, 37. 

Specialization, 89-90. 
Marginal producer. 

Taxation, 363. 
Marginal profit. 

Defined, 187. 
Market, 

External influences, 130-131. 

For capital, 270-271. 

For money, 269-270. 

General meaning, 126-127. 

Marginal buyers, 128-129. 

Marginal dis-utility, 129. 

Marginal utility, 128-129. 

Origin of, 123-123. 

Prices, 129-130. 

Protecting routes, 123. 

Supply and demand, 128-129. 

Typical operation, 124-126. 
Marketing, 

Farm produce, 67-70. 

Third stage in production, 38, 97. 
Marx, Karl, 440-444. 
Metayer, tenancies, 48. 
Middleman, 101-103. 
Migration, 

Permanent, 230. 

Temporary, 229-230. 
Mining, 

Coal, 84-86. 

Copper, 80-81. 

Gold, 75-77. 

Iron, 81-84. 

Labor in, 87-88. 

Legislation affecting, 79. 

Nickel, 81. 

Prices and camps, 80. 

Silver, 77-79. 
Money, 

Combinations, 271-272. 

Effect of quantity, 171. 



484 



INDEX 



Money {Continued). 

Gold and silver as, 108-110. 

Laws, 136-137, 185. 

Market, 270, 

Origins of, 106-108. 

Paper, 177. 

Periodical payments, 171-173. 

Prices, 170-184. 

Prospective production, 135-136. 

Standard of value, 110-111, 134- 
137. 
Monopoly, 

Government, 157-158. 

Law of substitution, 158-160. 

Prices, 157, 160-161. 

Quasi, 160-161. 

United States, 161-163. 
Montesquieu, 441. 
Moscow, 

Political strike of 1905, 7. 
Municipal government. 

Administration, 400-403. 

Canadian, 405. 

Commission form, 407. 

Debts, 397-398, 403-404, 407-409. 

Economic aspects, 390, 407-409. 

English, 403-403. 

Enterprise, 403-403, 407-409. 

Finance, 394-395. 

Officials, 405-407. 

Prison labor, 393-394. 

United States, 404-405. 

N 

National dividend. 

Advertising affecting, 100. 

Bargaining affecting, 98-99. 

Diminution of, 8-9. 

Distribution of, 196. 

Meaning of, 8. 
Natural resources. 

Conservation of, 317-319. 

Exploitation of, 319-321. 

Inducing immigration, 330-321. 

O 

Octrois, 394. 

Old-age pensions, 228-229, 428-430. 



Over-production, 
Manufacture, 93-94. 
Railways, 95. 
Wheat, 52, 96. 

Owen, Robert, 435. 



Panic of 1907, 175-176. 
Paper money, 177-179. 
Pension law, 

Canadian, 430. 

History of, 428-430. 

Old-age, in Great Britain, 227. 
Pojiulation, 

Concentration in cities, 149-151. 

Prices affected, 151-152. 

Wages affected, 238-239. 
Post Office, 

English, Canadian, U. S., 290. 
"Preferential Trade," 335-336. 
Prices, 

Bimetallism, 138-139. 

Changes in consumption, 148. 

Changes in production, 143-145. 

Changes of fashion, 153-154. 

Climate affecting, 140-141. 

"Complementary commodities," 
147-148. 

Consumption affecting, 328. 

Customary, 134. 

"Fair exchange," 133-134. 

Important increases, 311-313. 

In 1850-1875, 310-311. 

In 1890-1909, 311. 

Land, 383-384.. 

Legislation affecting, 185-195. 

Monopoly, 157, 160-161. 

Movements of population, 149-152. 

Of metals, 146-147. 

Political elections, 142-143. 

Regulation of fluctuations, 193. 

Standards of comfort, 152-153. 

Suppljr and demand, labor, 236- 
237. 

Trade cycles, 193-195. 
Primitive people. 

Barter and money, 104. 

Causes of dispute, 18-19. 



INDEX 



485 



Primitive people (Continued). 

Labor and ownership, 197. 

Land ownership, 43. 

Pottery, 14-16. 
Private luxury, 

In relation to "national dividend," 
9-10. 
Private ownership, 

Cause for dispute, 18. 

Of weapons, 18. 
Production, 

Changes in, 143-145. 

Complex, 16-18 (see Complex Pro- 
duction). 

Defined, 5-8. 

Dependent upon capital, 272-275. 

Detail, 11. 

Factors of, 208. 

Industries classified, 207-208. 

Mass, 11-12. 

Reacted upon by consumption, 
325-326. 

Simple, 13-16. 

Stages of, 37-38. 
Profit, 

Gross, 219. 

How brought about, 219-220. 

In joint stock company, 220. 

Net, 219. 

Source of, 218-219. 
Proudhon, 436, 441. 
Public expenditure, 

Classified, 372. 

Debts, 376-377, 382-387. 

Funded loans, 379-380. 

Government loans, 377-378. 

Government securities, 378-379. 

Recording, 373-376. 

Q 

Quasi-monopoly, 160-161, 235. 

R 

Railways, 

Construction in U. S., 275-277. 
Over-production of, 95. 
Regulation by state, 344-346. 



Rate of interest. 

Affecting land prices, 165-167. 
Raw material. 

Extraction of, 37-39. 

Fixed capital, 21-22. 

Requisite of production, 14-15. 
Rent, 

As surplus, 285-287. 

Austrian, 48-49. 

General application of term, 287. 

In new countries, 305-306. 

"Of ability," 287. 

Origin of, 279-280. 

Relation to law of diminishing re- 
turns, 28. 

Russian, 49. 

Theory of, 284-285. 
Rent interest earnings fund, 197. 
Retail trade, 101-103. 
Revenue, 

Classified, 363-365. 

State, 360. 
Revisionists, 443-444. 
Russo-Japanese War, 8. 
Russo-Turkish War of 1876-77, 6. 



Saint-Simon, 435. 
Settlement in new countries. 

Details of progress, 321-323. 

Exploiting natural resources, 320- 
321. 
"Shack town," 303-304. 
Smith, Adam, 

Theory of labor, 440. 

"The Wealth of the Nation," 8. 
Socialism, 

Contributors toward, 435-436, 440- 
444. 

Doctrines, 438-442. 

Origin and history of, 435-437. 

Progress, 437-438. 

Significance of, 444-445. 
"Social dividend" (see "National 

Dividend"). 
Social legislation, 

Accident compensation (see Ac- 
cident Compensation). 



486 



INDEX 



Social legislation {Continued). 

Factory Acts, 410-413. 

Old-age pensions, 337, 438-430. 

Unemployment, 433-434. 

Working day, 412-415. 
Speculation, 

Characterized, 189-190. 

Cornering, 190-192. 

Hedging, 191. 
Spirit Wrestlers, 201. 
Stock watering, 350-353. 
Strikes, 

Failures, 252. 

Probable results, 251-252. 
Silver, 

Amount existing, 135. 

As money, 108-110 (see Money). 

Bimetallism, 138-139. 

Effect on prices, 137-138. 

Mining, 77-79. 
Standard Oil Trust, 346-348. 
Superintendent, 

Demands upon, 233. 

Education, 333-335. 

Function of, 221-322. 

Salaries, 222-223. 
Supply and demand. 

Houses, 304-306. 

Influence of, 215-217. 

Interest, 269, 271. 

Labor, 236-337, 239. 

Market, 128-129. 
Syndicalism, 

British trade unionism affected, 
249. 

"Direct action," 441. 

Industrial Workers of the World, 
252, 253. 

Method, not doctrine, 442. 

Success, reason for, 443-444. 



Tariff, 

For revenue, 332-333. 
General, 185-189. 
Of Great Britain, 333. 
Protective, 331-333, 335. 



Taxation, 

Canadian provincial, 391-392. 
In monopoly, 187-189. 
In perfect competition, 187. 
Municipal, 394-395, 398-399. 
On corporations, 392-393. 
On income, 360-361, 365-366. 
National consumption, 289. 
Two theories of, 366-368. 

Thompson, William, 435, 440. 

Trade, 

Cycles, 193-195. 
Guilds, 203-204. 
Unrestricted, 204. 

Trade imionism. 

Capitalistic system, 265. 
"Closed," "open" shop, 256. 
Collective bargaining, 251-252. 
Congress in 1889, 248. 
Economic effects, 252-253. 
History of, 247-248. 
In Canada, 254-255. 
In Great Britain, 248-250. 
International, 255-256. 
In U. S., 253-254. 
Purposes of, 247-248. 
Strikes, 250-251. 

Transportation, 

Factor of production, 29. 
Labor and capital affected, 35. 
Land affected, 35. 
Methods of, 31-34. 
Opening new markets, 34. 
Relation to manufacture, 29-31. 
Rents affected, 35-36. 

Trust (see Corporations), 
Act, 263. 
Beef, 314. 
Defined, 160. 

Difficulty of dissolving, 343. 
Industrial Commission, 353. 
National ownership, 357, 359. 
Objections to in U. S., 342-343. 
Regulation of, by state, 346-347. 
Standard Oil, 346-348. 
Sugar, 347. 



INDEX 



487 



u 



Unemployment, 433-434. 
Uniform wage, 

DiiRculty of application, 238. 

Effect on sectional competition, 
226. 

Implied by collective bargaining, 
252. 

Other effects, 226-227. 
Usury, 

Agricultural, 58-59. 

Diminution of, 64. 

w 

Wages, 

Conciliation and arbitration, 261- 

264. 
Demand, 239-240. 



Wages (Continued). 

Marginal, 235. 

Minimum and maximum, 240-242. 

Mobility of labor, 230. 

Nominal and real, 232-233. 

Population affecting, 238-239. 

Productivity of labor affecting, 
237. 

Uniform, 236-228 (see Uniform 
Wage). 

Working day, 415. 
Watt, James, 204. 
Wholesale trade, 101-103. 
Wheat, 

Cultivation of, 49-51. 

From 1790-1810, 45-46. 

Market, 72. 

Over-production of, 52, 96. 

Specialist farmer, 52. 

Speculation in, 190. 



••J U i 



